Why the market’s got the jitters

Are we headed into a recession? Through all this week, volatile stock markets appeared to suggest just that. In times such as these, it takes humility for any institution to admit that it’s tough to say what’s going on. That’s what Kotak Client Advisory did. “Given our expectation of no significant impact on earnings, we maintain a neutral stance on equities.” Very simply put, stay away from the markets. It isn’t for the faint-hearted.
They say this with good reason. News from the US, the epicentre of all tech action, has been maddeningly impossible to keep pace with. Everything started with the euphoria surrounding artificial intelligence (AI) going kaput. This was after reports emerged about design flaws in Nvidia’s new chip, Blackwell. Why does this matter? Nvidia is one of the most powerful players in chips and powers a wide range of devices, from gaming computers to self-driving cars.
This delay was something like a much-anticipated movie premiere being postponed, leaving fans and distributors disappointed. In this case, extrapolate this scenario to include tech companies like Amazon, Google, Meta, and Microsoft. All of them had committed to investing billions of dollars into buying these chips. With Blackwell on their side, they were betting their AI capabilities would go up. Now, all their timelines get impacted.
Further down the chain, companies from healthcare to finance that rely on AI to improve efficiency and innovation get hurt. The stock market, sensitive to technological disruptions, reacted negatively. Analysts reckoned a shift in the balance of power in the global AI race could tilt to China. This is why the indices on Wall Street tumbled.
To top this, there was Japan, says Krishan Jha, a Bengaluru-based investor and analyst. No one had imagined the Bank of Japan, the country’s central bank, would hike interest rates. But its governor, Kazuo Ueda, did just that and suggested he will keep hiking it after years of low to negative interest rates. Why did this spook investors? For years, Japan had such low interest rates that it was almost like free money. People borrowed this cheap money from Japan and invested it elsewhere to earn more interest, like buying stocks in other countries. This is called the “Yen Carry Trade.”
When Japan raised its interest rates, loans got more expensive. This spooked those who borrowed from Japan. Now, they have to pay back more, and they’re worried about losing money on their investments. So, they’re selling off their investments in other countries to repay Japan, and there’s chaos everywhere. It’s like a big sale where everyone is rushing to get out, causing prices to drop.
Does all this explain why the markets in India were volatile? While some were jittery, optimists argued India is insulated against such global events. This, they say, is because retail investors are pumping in the money. That shows up in mutual fund SIPs.
But when the numbers are scrutinized closely, it appears there is a problem. “Rising SIPs are not an argument against any future market correction,” says Jha.
A metaphor will help here. Imagine you’re at a bustling wedding. Last year, the dance floor was packed, but this year it’s absolutely overflowing. Everyone and their uncle have joined the celebration. That’s similar to how SIP investments have grown compared to last year.
But here’s the twist. Even though the dance floor is bursting at the seams, the intensity of the dancing has mellowed. The wild moves have given way to a slow sway. Similarly, while the SIP investments continue to climb, the pace of growth has slowed down slightly. The music is still playing but the frenzy has settled. This is how the SIP party is looking right now—bigger than ever. But no one knows when the music may stop.
This, Jha explains, is why investments in the numbers in July are down to just 0.01%. Does this mean the markets may go bust? “I don’t know. No one knows,” he says.