Imagine when you open your portfolio and see red colour all over your portfolio. There is no negative news regarding the assets you own, no disappointing earnings and no sudden policy shock in India. Yet, your investments are on the decline. For many investors, this is a confusing and frustrating situation. The reality is that your portfolio is declining because of global falls. In today’s interconnected financial markets, the global market movements have a direct impact on Indian markets.

When major global markets plummet, fear and capital flows across borders. Indian stocks, mutual funds and ETFs are often highly sensitive to what has happened in the global market overnight. This is why it is useful to track global indices to understand the broader risk. Expert investors often compare indices from different regions to determine if weakness is local or part of a broader global risk-off phase. In this blog, we will explore how global falls impact Indian investors’ portfolios. 

How global market falls impact Indian investors’ portfolios

​The global market’s fall has a large impact on Indian investors’ portfolios due to various interrelated channels, which influence Indian market behaviour and long-term wealth creation. Some of those are: 

Economic interdependence

India’s economy is closely linked to the global trends, which makes it susceptible to the global market changes. For example, a slowdown in China can impact supply chains and the demand for Indian exports. Similarly, economic downturns in major markets, such as Europe or the US, can affect the revenues of Indian companies directly, especially in sectors such as IT services. 

Investor sentiment

Financial markets are governed by emotions, fear and uncertainty. A large fall in global markets can lead to panic and a sell-off in the Indian stock market. This phenomenon, known as contagion, can cause a fall in Indian equities, even when domestic economic fundamentals are strong.

Impact on export-oriented businesses

Many Indian companies are multinational or export-driven. A fall in the global market can negatively impact their earnings and growth potential, impacting their stock prices. Thus, investments in local companies are frequently correlated with global economic conditions. 

Correlation of global indices

Indian markets have a tendency to correlate with the global indices, such as the S&P 500 index, especially during market stress. Foreign Institutional Investors tend to withdraw their investments from the emerging markets like India, leading to further selling pressure on Indian equities. Understanding these correlations is important for investors.

Currency fluctuations 

Global downturns often result in currency fluctuation. A stronger US dollar in times of an economic crisis can raise costs for Indian companies dependent on imports or foreign debt. This affects the profitability and can erode the value of assets for Indian investors when converted back to Rupees.

What mistakes can investors make during global falls?

During times of global market downturns, investors often make mistakes due to fear, lack of understanding, and emotional response, which can harm the long-term financial health of their investments. Some of these mistakes include:

• Panic selling: One of the most common mistakes that most investors make is panic selling. Witnessing a sharp decline in their portfolio value due to global events can trigger fear in investors, leading them to sell their holdings without thorough research, only on the basis of emotions. This often leads to losses, turning temporary paper losses into permanent ones, and missing out on the subsequent market recovery.
  
  
• Attempting to time the market: Many investors attempt to time the market by selling at perceived highs and buying back at perceived lows. However, this is difficult even for professionals to achieve consistently because markets do not move in predictable straight lines. Attempting to time the market often results in buying late after prices have already risen or waiting endlessly for a perfect entry point that never comes.
  
  
• Over-checking daily prices: Monitoring stock prices daily, especially during volatile times, can cause investors to become more anxious and make impulsive decisions. This constant attention to short-term movements is a distraction for their long-term investment horizon.
  
  
• Ignoring fundamental strength: During a global downturn, investors often do not pay attention to the fundamental strength of the companies they own and get swept up in the broad market sell-off. Selling fundamentally strong companies due to market fluctuations leads to missing out on their long-term growth prospects and their ability to recover and perform well after the crisis is over.

What should investors do during global falls?

When the global markets are going through a downturn, it is important to be disciplined and patient to secure your portfolio and position it for future growth. Here is some advice for investors when the global markets are in a slump:

• Rebalance your portfolio: This is the right time to take a step back and re-evaluate your portfolio. You can use this time to review your financial goals and ensure that your portfolio is in line with your risk profile. This is not the time to act out of fear; this is the time to make rational decisions based on the changing market scenario.
  
  
• Maintain a long-term perspective: Market corrections are a part of the market cycle. By keeping a long-term perspective, you are able to ride out the turbulence without making decisions based on emotions. History has proved that strong economies such as India have bounced back from market falls and that those who held a long-term view have made attractive returns.
  
  
• Compare indices: Do not get swayed by the market sentiment. Evaluate different indices to better gauge the market sentiment and how your investments in different sectors or asset classes are performing to make informed decisions regarding the investments that are sharply declining.
  
  
• Avoid emotional decisions: Making decisions in a panic or based on short-term fluctuations in the market can often result in the wrong decision. It is best to stick to your investment strategy and not make any panic decisions based on fear or market fluctuations. 

How to protect your portfolio from global falls

Protecting your portfolio from the consequences of global market falls requires a combination of the following strategies: 

Diversification

Diversify your investments by allocating them in different types of assets such as stocks, bonds, gold and mutual funds, etc. This can help to mitigate the overall portfolio risk. When the stock market is volatile due to falls in the global market, investments in instruments such as gold can help to stabilise and reduce the overall risk. 

Choose fundamentally strong stocks

The key is to focus on making investments in fundamentally strong companies. Look for companies that have a history of being profitable, low or no debt levels and stable revenue growth. These companies are more likely to do better during times of global economic downturn.

Implement regular investing (SIP)

Investing a fixed amount of money at regular intervals, regardless of market conditions, is a strong plan to fight the impacts of global falls. SIPs help in rupee cost averaging, i.e. you can buy more shares when the prices are low and fewer when the prices are high, thereby averaging out your purchase price over a long period of time. This disciplined approach helps to reduce the effect of market volatility.

Establish a long-term investment horizon

Commit to a long timeframe over which you will hold your investments (usually 5-10 years). Regularly review your portfolio (often twice annually), and rebalance your portfolio to meet your financial goals. Long-term wealth is built when stocks are allowed to ride out the volatility in the market to provide multibagger returns. 

Focus on domestic cyclicals

Invest in sectors that are insulated from global shocks. Revenue of FMCG and hospital stocks relies mostly on the Indian consumer and not on global trade. Even if the global markets are in recession, Indian consumers will still purchase toothpaste and visit doctors. These defensive sectors tend to bleed less than export-oriented sectors in global downturns. 

Maintain an emergency fund

Often, panic is caused by a lack of liquidity. If you do not have sufficient funds and need emergency funds, then you will have to liquidate your stock market holdings to gain the funds for emergencies. Thus, make sure you have 3 to 6 months of expenses in a liquid fund/fixed deposit. This sleeping money enables you to maintain your bleeding stock portfolio with detachment, knowing you don’t need to sell today. 

Stay updated

Stay updated on stock market news of companies and sectors that you’ve invested in. Switch your focus from the daily stock market news to whether the underlying business is growing its customer base and profitability. This deep understanding leads to confidence and patience, especially during global market falls. 

Wrapping up

The bleeding of your portfolio during global market falls is a complex interplay of economic interdependence, investor psychology, currency dynamics and market structure. For an Indian investor, it is important to understand these global connections and how they are affecting India’s domestic market.

While it is impossible to be completely immune to a global market fall, a well-informed, disciplined and long-term approach, with a strong focus on patience, could empower Indian investors to make more informed decisions and see them through the turbulent times with more resilience.