The proportion of people who believe that a global markets meltdown of some kind is in the offing in 2016 seems to be quite high. Some of these are names that draw attention, for example, George Soros. There are other as well, in India as well as abroad. Are they right, and do investors have anything very serious to worry about?
For the last three or four years, one problem with such predictions has been the long shadow of the 2008 global crash. It seems that those who predict a large fall in equity prices are unable to do so without drawing a parallel to 2008. Mediapersons too tend to reduce discussion to whether the fall being predicted will be like 2008 or not. The 2008 crash is now like an elephant in a room full of blind men. It means different things to different people. When an Indian equity investor hears that there will be a crash like 2008, he thinks about stocks falling to half or less. Someone in the US would think of big Wall Street names disappearing or having to be rescued by the government. Someone in a non-financial business might think of the sudden drying up of credit. Those who run governments and central banks will have a completely different perspective on 2008.
For many people, 2008 was characterised by a fear, however temporary, that the global economic machine would seize up. I remember a joke that was being sent around by SMS at the height of the fear phase: First guy: "The financial crisis is making me really pessimistic. I'm starting to buy gold". Second guy: "You're an optimist. I'm buying rice." By the way, if you would like a vivid reminder of the crisis and what caused it, do watch a recent movie named 'The Big Short'. It hasn't been released in India so you will have to find it some other way.
If markets do collapse, then it will surely have some resemblance to 2008 but then it will also have some resemblance to every other crash ever. Or maybe not. After all, this coming hypothetical crash is likely to have the Chinese economy as exhibit A. That's something that has never happened before, so perhaps we really are in for a novel experience. What all this does mean is that whether a coming situation will or will not be like 2008 is a particularly useless kind of discussion. For the ordinary investor, what matters is what they should do. Should they believe in this crash story? Or should they believe that the worse is over for the Indian corporate sector, which is also an opinion no less widely held than the other one nowadays.
So which should it be? How about neither? How about not caring and carrying on with an investment strategy that will be fine no matter what? If there is a lesson to be drawn from the Great Crash of 2008, then it is that you shouldn't do anything with your long-term investments. If, in your equity (equity mutual fund) investments, you are holding savings that are needed for a few years to come, then just ignore all this noise and do nothing. If you are making fresh equity fund investments regularly, through an SIP for example, then too you should ignore all the noise and just carry on regardless.
As I'd written in this column some weeks back, there are a huge number of people who have started investing in equity mutual funds in the last couple of years, and what they do in the face of a market fall is important. Look back at what happened from 2008 to 2011. The worst off were those who reacted to the crash (or the high valuations just before the crash) and sold their investments and had to invest back again when the markets went up. In sharp contrast, the best off are those who just continued investing steadily through the crash. Their investments recovered smartly, and they made great returns on the investments they made when the markets were down.
The bottomline is that there is obviously no way of being certain what will happen. And in any case, many of the 2008-type warnings come from people who are permanent pessimists. Ignore the noise, and carry on.
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