Over the years, one of the hottest topics among economists and market pundits was China’s move from being an export driven economy to a consumer driven economy. Multiple scenarios were played out and often positive outcomes were expected. The expectation was that the mighty Chinese establishment would find a way to move the Chinese economy from one horse in the middle of the race.
It became a game of self-fulfilling hypothesis where everyone expected that the Chinese economy could handle the sudden shifts and grow at the same time. The last one month has seen these myths shattered. Not surprisingly markets are in panic mode and are going through a selloff. Everything that the Chinese government has thrown at the market has fallen by the wayside. Is the state of affairs so bad or was it just a case of mismatched expectations?
As a clear indication of the importance of the Chinese economy to the world’s economic growth, ripple effects were seen across the world. The scale of selloff firmly establishes China as the economy that will perhaps be, and is, as important as the US economy.
The lesson for India is that, there is no soft landing. Changing course is not easy, for emerging markets are behemoth economies that are going to grow at a rapid pace. The Chinese economy growing at 5% is still fast enough to push other markets into a positive growth given its strong will to manage itself at a macro- economic level. This, and the fact that the European Union impasse will clear towards the end of the year, coupled with India’s growth potential will ensure that the current phase of volatility across markets is just temporary.
In fact, this meltdown is not the first time we are seeing the markets tank - market downtrends were seen in 2007-08 and 2000 too - and the trend of triggers leading to wealth erosion is not new earlier. Today it is China; tomorrow, the trigger could be something else. And through these cycles of boom and bust, only some investors have made wealth consistently. The lesson for an individual is not be too concerned about the rough seas in the market place. Ride them out by reducing unsystematic risk and placing money in different baskets through a diversified portfolio. Diversification ensures that you spread out the risks, yet view the basket as a whole and not as individual picks.
And this is where a professional advisor really adds value. While as an individual investor one is swayed by emotions, a professional advisor will take a more balanced view of the tidings in the markets and, factor in the macro-economic fundamentals and also look at the long-term horizon. By understanding an investor’s expectation of return, arriving at the risk appetite and taking out emotional biases, the financial advisor is able to recommend a diversified portfolio that is as unique as an individual. However, not every advisor/investor is capable of building a sound, diversified portfolio and not every customer has access to a professional financial advisor. Which is where technology comes into play.
Robo-advisors use technology to deliver affordable money/wealth management advice to an individual by using behavioral finance models and algorithms. By doing so, they create customized financial plans that are unique and best suited to ride over any market volatility.
ArthaYantra is a Financial Life Management Advisor. A robo-advisor with over 70,000 customers across 600+ cities/towns in India and 30 countries across the world, we offer personal financial advice to individuals irrespective of their income. Arthos, our online platform, replaces the traditional human financial advisor by making holistic high quality financial advice accessible to all. Connecting all aspects of an individual’s financial life, it helps them in setting realistic financial goals and creates/offers unbiased, comprehensive and customized portfolio for achieving their set financial goals. Take a look at www.arthayantra.com
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