Pessimism and optimism are structurally very different in the way they are formed. For example, it is very easy to manufacture pessimism. All we need is for a sharp spike of fear and a string of bad news. The pessimism so formed takes a very long time to recede and turn into optimism. Let us understand from a recent example. The loans of Kingfisher airlines were seen as duds and unrecoverable lemons. This started the economic bearishness on the banking sector. Subsequently, the commodity crash created overgrown fears of a complete economic crisis in the banking space. The stock markets fell sharply through January and February precisely on this sentiment. Recently under the guidance of the Supreme Court, the banks and Mallya, have begun to engage on the mechanics of a settlement of the loans outstanding. There is also a proactive trend by RBI to ensure that banks provide adequately. This is pushing banks to recover loans or initiate actions to effect change of ownership. Clearly, the crisis has been turned into an opportunity to cleanse the entire system. The government is sending strong signal to the defaulting corporates and also allowing the RBI and banks to independently do everything it takes to recover loans. Troubled banks got fresh capital from the government. A holistic approach to a crisis of this magnitude should definitely have seen the pessimism reduce. But, it doesn’t seem to be happening. The shift in sentiment from pessimism to optimism maybe delayed. The markets still are very much gripped by fear of the known. When known fears recede, we should see a knee-jerk return of optimism. But, it could well be too abrupt for us to react. The time to be greedy is now.
“Don’t be afraid to go out on a limb. That’s where the fruit is.” – H. Jackson Browne