Cut the noise to make sound investments

Over the last week, there's been media frenzy about the imminent fallout of Evergrande and its possible spillover across the world. There were multiple views about how it would impact Indian markets and thus the investment portfolios. Even some termed it as the China's Lehman moment, others have brushed it off as a small aberration. While some believe that it's just the tip of an iceberg and a growing sign of a contagion, some on contrary feel that this could be controlled by the administration easily.

The second largest economy has been on a reengineering drive thus making some policy decisions across the sectors for their targeted results. In an attempt to balance the demographic situation, they've identified key areas for reforms that could enhance the possibilities as per the new vision. Chinese government has restricted on the education costs (online edu-apps), the excesses in the technology usage (data gathering, gaming), curtailing the growing influence of the corporate world (profits, social responsibility) and pursuing the agenda of 'common prosperity'. Parallelly, the government has stepped up on the environment agenda limiting the progress of certain sectors in a bid to realize some very sharp deadlines on arresting pollution levels.

These measures started to structurally alter the economy as they tread on the new path, though it might seem like a method to the madness, it's disrupting the investor sentiments. This is simultaneously happening at the backdrop of the Covid pandemic and the ensued disparity in supply chains across the world. The rest of the world also realized the heavy dependence on one country and began to diversify the risks by replacing part of their supply chains beyond China. The animosity that has prevailed post the pandemic has transformed the bilateral trade among the countries leading to further short-term disruptions.

Though I've my own set of perspectives about this episode, would refrain from making any predictions on what it turns out to be in the end. These developments certainly throw up opportunities for India in gaining from the diversification the world is moving on, especially in the manufacturing space. However, it's not an easy transition despite the govt. pursuing the agenda with disincentivizing the imports concurrently announcing proactively various Production Linked Incentives (PLI) across multiple manufacturing sectors. It's true that the macro changes along with the tax inducements and policy push makes India an attractive destination for the diversification but it mayn't always translate to reality.

Some of these changes could have an impact in the short to immediate shocks, a few would affect in the longer term. For instance, the freight charges are hitting the roof, but would they remain so high forever is the question. So, one could explore a few tactical bets to chance upon as the story unravels but that could remain on the fringes in one's portfolio.

If one were to observe the news, almost all the time, one finds something interesting or disturbing being reported. In a week from now there would be a feverish level of cacophony over the US's debt ceiling which if not raised by their legislature would make the US default on its debt payments, a first for that country. If it were to happen, imagine the grand scale of collapse in the sentiment, though materially it may not translate to much. Markets are a collective manifestation of the larger participants, their expectations and their emotions. So, the more people see a certainty in an outcome from an event, the gyrations of the markets tend towards it.

At all the times we find some or other news that could or we assume to have an impact on how the markets tend to react. It's said that successful investing depends upon tuning out the noise while focusing on what matters. It's important to separate the nose from the relevant and it certainly is not easy to do it. To remain like a saint or a yogi being detached to the whole world or sticking to your own philosophy.

Some simple steps to shut the noise are to have a filter over the relevance of the news. It's true we may not have all the information of a future event, but the analysis should attempt at what possible risk it could lead to. Of course, diversification helps and thus asset allocation becomes key in a portfolio. Also, having a portfolio in the first place is a good insurance.

Analyze how much of that news could impact your portfolio and don't fiddle frequently. Accept volatility is part of the game and navigating it would help do well in the markets. Stick to your priorities, risk appetite and tolerance. Resist being carried away with the drawdowns or boom cycles of the market but ensure adequate protection to smoothen out.

The results of our investment would not depend on how the markets react to the news but how we respond to the market's reaction. I would rather concentrate on things that are in my control. I know I can't control the movement of the markets but certainly I've the power to rein my emotions at those testing times.

(The author is a co-founder of 'Wealocity,' a wealth management firm and could be reached at [email protected])