When the going gets tough, the tough get going.
Fragility in life and volatility in markets is not preferred by anyone. That being said, it is only pragmatic for us to acknowledge that it’s inevitable. The important aspect is the way you conduct yourself during volatile times, that in turn sets you up for better times.
Currently, global equity markets are going through one rough patch. Both developed and developing markets have fallen from their peak and are witnessing excessive volatility across the board.
Before going any further, there is merit in mentioning that the purpose of this blog post is not to bombard you with intimidating numbers around the market fall. Rather, we aim to paint a picture of the present market environment and give you a sense of what could be in store for us ahead.
So, to start with, let’s talk about money supply.
Money supply is one of the most important factors as far as stock markets are concerned. The supply of money commands investor behaviour and determines the flow of funds in or out of the markets. You see, ever since the onset of the COVID-19 pandemic, central banks across the globe started to bring down interest rates and began printing more money than usual, in order to keep the economy afloat. Basically easy money. Come to 2022, that party is over. The pandemic has subsided to a large extent and central banks think that it is time for them to restore normalcy in the economy.
Now, one thing that easy money has done is escalate inflation in the economy. Worldwide we are witnessing decade-high inflation rates. So, what do central banks do to restore normalcy and prevent overheating in the economy? Increase interest rates so that people avoid borrowing money which will end up delaying their spending plans. This will bring down the liquidity from the system, as less number of people will make spends, helping control inflation. To add to that, interest rate hikes bring down overall market valuations as well.
Secondly, as you would guess, is inflation. For the uninitiated, inflation refers to the general rise in prices of commodities that reduces your purchasing power. But, why do equity markets not like inflation? The most significant impact of inflation is on company margins, wherein their raw material prices shoot up and companies suffer. Margin shrinkage for any listed company is a cue for price decline. Also, on a broader level, inflation disturbs the budget of a household and general expenses rise. This leaves a household with lesser disposable income for investments.
Lastly, geopolitical tensions. Though a peripheral point, the Russia-Ukraine crisis has crushed market sentiments substantially. Not only has the crisis introduced a multitude of problems in the supply chain, but also pushed up the prices of important commodities. Naturally, this has raised the procurement costs of companies, ending up hurting their production.
At Windmill Capital, we believe it is our duty to keep our investors informed about key market developments and provide insights into the way an ideal long-term investor shall operate. We urge you to not take any haste decisions around your portfolio and to be patient. Sometimes, not doing anything is better in the long run.