The Indian stock markets have not become significantly more (or less) volatile at least for the last 25 years or so. I know that when I say that it will instinctively sound incorrect to you. You're probably waiting for the 'but…' part of that sentence. But there is no but. It really is true. Here at Value Research, we're doing some research on whether, as is the general impression nowadays, the stock markets have become more volatile. The study isn't complete yet but it's clear that as far as the bellwether Sensex goes, volatility is essentially unchanged since 1979. True, there was a huge peak in the Sensex' jumpiness during 1992, but that just lasted a few months.
Then why do all of us feel that the markets have become a lot more fickle? There are a bunch of reasons but the major one is simply the media's obsession with the absolute figure of the Sensex. It is a simple fact of arithmetic and mass media that percentage changes are much less exciting than absolute numbers. Compare these: On 15 June 2006, the Sensex closed 616 points higher than the previous close. This was a 6.9 per cent rise. On March 25, 1986 the Sensex closed 9.1 per cent higher than the previous close. But this was a rise of a mere 48 points. Closer home, the Sensex fell by exactly the same percentage (6.9) on April 17, 1999, but this was just 246 points. When I see headlines in newspapers and on TV channels focusing exclusively on the actual numbers of points, it's clear to me that there's a fake idea of the markets' volatility that is being peddled just to add a sensation because sensation sells.
After all, if you were a TV or a print newsman, which of these two headlines would you have chosen the day after Mr Chidambaram presented Budget 2007: 'Markets register fourth worst fall ever'; or, 'Markets register 96th worse fall ever'. Both are technically true but I believe that the first one is misleading and shows a deep contempt for the readers' intelligence by using the absolute number of the Sensex rather than the percentage. Absolute numbers must never be used to compare quantities that have different bases. By the way, aren't you surprised that leave alone the top 5 falls, 28th February barely made it to the list of the top 100 falls? That this comes as a surprise to so many people shows how completely we've all been fooled by this volatility story that's being peddled.
So is there no other reason beyond these fun-with-maths headlines that contributes to investors' volatility psychosis? I for one am hard-pressed to think of one. True, our study isn't complete and we'll be looking at indices as well individual companies more closely but my hunch is that this is the way it is. I'm not ruling out more volatility in the future, at least temporarily, but you know, the sky isn't really falling. There's a deep bedrock of current and potential economic growth which won't vanish overnight just because of new taxes in China or whatever. And that's going to be true for quite some time to come, whether headline writers are into percentages or not.
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