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Global aspects influence but domestic factors are the ones that decide


To start with the obvious, your returns from equity investments depend upon the EPS (earnings per share) growth of the investee companies and the extent of fresh money entering the stock market. Interest rate decisions of the Reserve Bank of India (RBI) are based on inflation in India. But why state the obvious? The reason is that global events and developments shape our market sentiments in the near term.

When something hits us optically all the time, we start believing that is more important than something which is not so visible. Let’s take a recent case in point. The recent CPI inflation data in the US came in a little ‘lower’ at 7.7% and the equity market rallied the next day. Is the event relevant? Yes. But we have to distinguish between relevant and decisive.

In our example, inflation in the US is relevant. The war between Russia and Ukraine is relevant, too, as are the tensions between China-Taiwan-US. Then, what is decisive? Assuming you have invested in equities for a horizon of, say, 10 years, the EPS growth of companies over the next 10 years is decisive. Government policies and GDP growth over the next 10 years is decisive. The efficiency of your portfolio manager / financial adviser is decisive. The retail boom and new investors and money entering the market are decisive.


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But let us dig deeper. You will be thinking that in today’s inter-connected world, there is no need to distinguish between relevant and decisive. Ultimately everything impacts your portfolio performance. However, even in today’s inter-connected world, when one event in any corner of the globe gets flashed across social media and mobile phone screens in a jiffy, and influences markets across the globe, returns vary significantly.

Returns from our market are represented by the Nifty 50 and Nifty 500. In the table, we see data from four calendar years, 2019 to 2022 YTD (year-to-date). This data is available for 11 years, from 2012 to 2022 YTD for eight indices for a global perspective. In five out of these 11 years, our market has delivered relatively superior returns and in six of these years, the returns have not been so good. The winner varies from year to year.

The message from the data-set is that performance of the markets represented in the table vary significantly from year to year. This is in spite of free flow of funds across international borders and instant flow of information. This proves the point that your equity returns are more dependent on the decisive factors, which are the domestic factors. Global aspects influence and are relevant in that sense, but that’s about it.

Now let’s turn to the bond market.

Much noise is being made about the reducing differential between the US Fed rate and the RBI repo rate, and US-India government bond yields. The argument being given is, this should prompt the RBI to hike rates to a level higher than warranted by our fundamentals, e.g. inflation. Global central bank rate levels and global government bond yield levels are relevant, not decisive for the RBI.

The decisive aspects are inflation and GDP growth rate in India. Global rate levels are part of the policy formulation meeting deliberations, but not the basis for taking decisions.

The next review meeting of the RBI is scheduled for 7 December 2022 where they are expected to hike the repo rate by 25 – 35 basis points. The meeting after that is on 8 February 2023, where they may or may not hike interest rates, but that is expected to be the last one in this rate hike cycle. Beyond February 2023, the US Fed or the European Central Bank may hike rates, but the RBI need not reciprocate.

What should you do?

Track relevant global and domestic events, for the sake of awareness. But have clarity on the decisive aspects as these are more fundamental to your investment portfolio. You need not act on day-to-day developments on relevant events. Only when there is a change in the fundamental decisive aspects, you need to do a serious review of your portfolio.

Joydeep Sen is a corporate trainer and author

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