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Swimming in choppy seas

In the last year, markets like China and India have had 10% falls in a day, thankfully not very often, due to high volatility, writes Udayan Mukherjee.

india Updated: Apr 19, 2007 21:41 IST

The one factor which has marked global market movements over the last few months is the unusually high level of volatility. It seems all very exciting but investors have had to realign their strategies in the light of these wild swings, which are fast becoming the core fabric of emerging market investing.

You can see that 2 to 3 per cent index swings in a single session are par for the course. In the last year, big markets like China and India have had 10 per cent falls in a day, thankfully not very often. Why, China was down 5 per cent only yesterday, on fears of interest rate hikes.

This is the price of global integration. There are just too many triggers at play at any point and too many diverse pools of money sloshing about. Anything could spark off a rally or a sell off : US economic data, signals on global interest rates, the dollar, the yen, regulatory action from China, crude prices and geopolitics.

Reacting to these triggers is a vast pool of money which is moving around chasing absolute returns. Billions of dollars move in and out of markets in the matter of days. This has also had the effect of compressing market cycles. Earlier, multi year bull markets would be followed by multi year bear markets.

Today, the market seems in a tearing rush to discount good news and bad, which is why stocks are often seen running way ahead of fundamentals and conversely, crashing, to price in all bad news very very quickly.

In these markets, you have to be nimble. Not just traders, even investors. A sector could give you a 25 per cent swing in a fortnight. If you miss it, you probably have missed the bus for a while at least. Banks, cement, automobiles are all good recent examples. The other must-do is to acquire some expertise in the derivatives market. Too many people, even today, just use it to take naked directional calls. In a volatile market, that can kill you.

But volatility can be milked very well by using options and even neutralised to a certain extent. One needs to get back to the classroom. After all, the global market is like a furiously churning cauldron.It will simply spit you out if you can't deal with the spin.