Markets have a habit of surprising investors. The surprise tends to vary in intensity and impact. How markets react to surprises, determines the extent. When the intensity is strong, the impact is likely to be high.
Markets always tend to be unprepared for surprises. This is ironic considering that markets know fully well that surprises can happen at any time. Yet, the market always assumes that it knows when surprises won’t happen.
The truth is that the markets just don’t know.
The government’s announcement to recapitalize PSU banks came exactly when prices were near yearly lows. Nobody thought that the government had answers to their problems. What we forgot is that the government was faced with a TINA situation. There was no available alternative but for the government to deal with their biggest economic problem. And, they did just that.
That the stock market missed the woods for the trees only shows the negatives of market’s anchoring. The sharp price reaction to the recapitalization news is not mature either. The mature approach would have been to weigh the impact on each bank, to understand how companies would evolve, and assess the extent of capital that the government needs to revitalise the public sector banks.
The game has just begun.
“The road to long-term investment success runs through risk control more than through aggressiveness.” – Howard Marks