What We See from the History of Spooked Markets

Sep 30, 2016

In this issue:
» Berkshire Hathaway returning back to India
» Government kick starts Strategic sale process
» India's Unemployment problem far from over?
» ...and more!

00:00 Chart of the day

Tanushree Banerjee, Co-Head of Research

Markets have little tolerance for uncertainty and volatility. Yesterday's sharp correction was attributed to the 30% rise in the volatility index (VIX) on the reports of 'cross border' surgical strike. VIX is nothing but an index on the NSE that helps participants trade and hedge against expected market volatility.

However, if we look back at the history of spooked markets, the correlation between market corrections and the volatility index is not very strong. The data for NSE Volatility Index is available only since 2008. So we are not sure if the index would have spiked during the Kargil War in 1999. But it turns out that the BSE Sensex actually gained about 16% during the three months the war lasted. The index remained flat in the month following the December 2001 Parliament attack too.

The volatility index shot into prominence in 2008. And the terrorist strikes did not move markets much. But the extreme volatility during the subprime crisis eroded almost 60% of India's market cap. Yesterday's change in the volatility index was one of the sharpest in recent times. And going by history, the negative sentiment in the market may only be temporary.

History of Spooked Markets

This does not mean that a sharp correction isn't around the corner. There are grave global macro-economic risks. Not to mention a potential Fed rate hike, the government's stumbling over reforms, and expensive valuations. So one must be prepared for sharper corrections.

Meanwhile, we'll continue to tell you how to stay ahead of fellow investors. Grim reminders of the 2008 and 2013 crashes will warn you of the susceptibility of your portfolio to go bust. Others will tell you to lose no time in being greedy when everyone is fearful.

Therefore, don't blame yourself if the oversupply of advice confuses you. As an investor looking to build wealth over the long term, you need to prioritise your actions. A focus on wealth preservation will give you an edge.

Most investors fail to exit stocks when the fundamentals weaken or valuations overheat. In the bargain, they undo all the efforts that had helped create their notional wealth. So before you do anything else, weed out the problem stocks from your portfolio.

And always keep enough cash. Being prepared to take advantage of a market correction is better than buying stocks in a frenzy. The choicest stocks will offer good entry points at the most unexpected times. Of course, it may not be possible to buy at the precise bottom. But knowing that your portfolio has limited downside will give you the confidence to stay invested. And your cash reserves will offer some cushion even as some stocks stay in the red temporarily.

This is the best time to prepare yourself for what you probably missed out on during the 2009 and 2013 crashes. So don't let the volatility index spook you. Instead, let your cash buffer allow you the patience and perseverance to ride the market volatility.

We believe we have found 5 warning signals or red flags that show up in a business right before its stock price plummets. Get the details in The 'Crash Score' Report.

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During 2012-13, slew of announcements were made in the Foreign direct investment or FDI space. Despite increasing foreign participation, not much headway has been made on this front. Why? Because of the complications and vagaries in policies and regulations. The lack of clarity and other bureaucratic issues have been the key concerns.

Companies such as Wal-Mart, Arcelor Mittal had abandoned their investment plans. And even Warren Buffet's Berkshire Hathaway, had shut down its Indian insurance business. Owing to stifling regulations, Buffet's insurance business had shown reluctance to commence business in India since its exit.

However, India now seems to be going through an image makeover. As an article on Economic Times cites, Berkshire Hathaway is looking back to re-establish its reinsurance branch which would be much bigger than what it was when it was into insurance broking.

This may seem like too small a development to make any difference to Indian economy. But it's a kind of reminder of the huge potential India has, provided government comes with true economic reform, political openness and where investors can trust their money is safe. One can be hopeful of seeing more Buffetts of the world to come to India and stay.


At the time of Budget, Finance Minister had announced a disinvestment target for 2016-17 of Rs 565 bn There were two parts to this number. First is the 'normal' disinvestment of Rs 360 bn. Last week, we wrote how government is taking measure to meet its divestment target. Buy back route aided the government's divestment target of Rs 360 bn. By Oct 2016, it is anticipated government will earn close to Rs 200 bn.

Second is the target of Rs 205 bn from 'strategic sales.' This is where things get interesting. 'Strategic sales' is another term for privatisation. The government will sell a substantial portion of its holding in the company and also give up management control.

Recently, the Union government formally kick started strategic sale process with Allahabad based Bharat Pumps and Compressors (BPCL) and Hindustan Cables (HCL).

While we believe the government's intention is good, it is also imperative to note that all previous attempts have been hampered by labour union protests. Infact there have been no strategic sales between fiscal 2004 and 2016. No doubt, the road ahead is difficult. But we believe the government will have to adopt such measures in order to meet its target.


In the coming few years, India is believed to have the world's largest population of working people. Now, when nations reach a high ratio of such people, they are expected to earn something called as the demographic dividend. But to reap the benefits of demographic dividend, the government of the day should also be able to create the right environment in which jobs are created.

However, the recent unemployment data does not paint an encouraging picture.

An article in Mint cites that according to the fifth annual employment-unemployment survey at all-India level, around 77% of the households were reported to be having no regular wage/salaried person. Unemployment rate in India at 5%, is highest in 5 years.

Speaking about India's macro issues, Vivek Kaul has been addressing a range of such issues in his recently launched newsletter, The Vivek Kaul Letter.

In fact, Vivek Kaul has recently recorded a video that explains why India's employment crisis is much bigger than investors and companies imagine. A must watch for every reader.


In the meanwhile, after opening the day on a flat note, the Indian stock markets continued to hover around the dotted line. Major sectoral indices were trading on a mixed note with stocks from realty, oil & gas leading the pack of gainers. While metal & FMCG were leading the losses. At the time of writing, the BSE Sensex was trading lower by 48 points (down 0.1 %) while the NSE Nifty was trading lower by 10 points (down 0.1%). The BSE Mid Cap index and BSE Small Cap index were trading higher by 1% each.

04:50 Investing mantra

"Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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Here is the way to ride over the market volatility.
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