The Volatility Paradox
The week saw increased scrip level volatility and better index level stability. This paradox is increasingly becoming a trend in our markets. Indices are showing lower volatility while more constituent scrips are showing very high volatility.
The closer scrutiny in the corporate governance of individual companies is clearly the reason for this volatility. The strength of the indices is somewhat overrated and attributable to concentrated investment performance in a few pivotal stocks. It is pertinent to note that these insular pivotal stocks do not boast of significantly superior corporate governance over their punished peers. So, we can’t really take their investment performance for granted or insulate the company from similar crises in corporate governance.
The churn will definitely induce high volatility will and we could see investors use this volatility to sell stocks outside the index too. Investment flows into Mutual funds are also moderating and this will also weigh very heavily on valuations of non-index public stocks.
Overall, the coming months will see increasing volatility due to rising fear. Investment decision making will become more impulsive and less reasoned. Emotionally stable investors will handle their investment choices displaying better maturity than reactive investors. This singular trait can make the biggest difference in investing in 2019 and influence outcomes significantly.