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How to Counter Volatility?
Tue, 3 May Pre-Open

The financial market has been messy lately. There is volatility all around and economies are struggling to find their way out of it.

Last month especially was quite eventful. Here is a glimpse of key events that moved the markets:

  • The summit in Doha among the world's largest oil producing countries turned out to be a complete wash. Key oil producers failed to agree on a production cap that could have tightened supply. The outcome of this led to a plunge in crude oil prices. And markets are now speculating where the oil prices will land in the coming days.
  • The US Federal Reserve kept its benchmark rates untouched in its two-day policy meet last week. The announcement dragged the dollar lower and sparked a rally in safe-haven assets.
  • The Bank of Japan (BOJ) left its monetary policy steady last week. The central bank continued with its negative interest rates policy (NIRP) and maintained interest rates at -0.1%. Further, it maintained its base money target at 80 trillion yen. This led to a sell-off in the stock markets in Japan. The yen strengthened and traders went risk-off.
  • Government data showed that the US economy grew at its weakest quarterly pace in two years between the months of January and March. The gross domestic product (GDP) expanded just 0.5% at an annualised rate during the quarter.

    • And this phase is not over yet. There are some upcoming announcements that market is waiting for.

    One is the Chinese Purchasing Managers' Index (PMI) data to be released this week. The data will provide some clues on the upcoming Chinese trends. Then there is the UK referendum on Brexit in June. Most importantly, the event that will remain an overhang will be US presidential elections, scheduled in November.

    Back home, the result season has kicked in. The performance so far has been mixed and investors are now waiting for further indication in this regard. The government is looking to merge PSU banks.

    Looking at the scenario, one can say that the ongoing volatility is here to stay.

    We don't know how the markets will react to above macro-economic events. We might as well flip a coin and decide the effect of how markets will move in the short run.

    So how can one counter this volatility and keep odds in one's favour?

    The answer can be a long term investment horizon.

    As far as the outlook over the next two to three years is concerned, we think the benchmark indices can go up as much as 70% during this timeframe.

    So rather than being afraid of the volatility, broaden your time horizon. Richa Agarwal, Research Analyst, suggests that as your time horizon increases, the volatility of your returns diminishes. So if you face volatility, don't panic. Buy good quality businesses on dips and exit if stocks run up beyond what fundamentals can justify.

    Remember - Your net worth is not what Mr Market will pay you today, but rather the intrinsic value of the stocks you own based on the fundamentals of the underlying businesses.

    For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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