There has been a major shift in how we viewed the world just a few days ago and how we view it now. How much difference does a few days, and some news flow make!

So, what has changed? For one, the surprise (or was it a surprise to some?) victory of Donald Trump in the US Presidential election has the potential to be a major change in economic direction. As has been argued in the column in the past, each of the US Presidential candidates had a different approach to the economy in general and to issues in particular. This promises to have a major impact on markets and their direction in the years to come. While these changes are part of the overall narrative and do not change the corporate picture for the very long term, it has potential to alter the status quo in the interim and cause disruption and change to portfolios and orientation.

While it would not be prudent to estimate the policy changes under the new regime at this time, it is important to highlight that some issues will take priority over others. While immigration was a major point of contention in the recently concluded race, any changes to regulation related to the same will have to be weighed by the new administration with care as this is a doubled edged sword equally benefiting and causing a strain on resources on the economy depending on how one views the situation. While illegal immigration is the proclaimed “bad thing” policies could affect temporary visa status of a large mass of onsite employees of Indian software firms.

Foreign policy and trade are the other important issues that are uncertain under the new administration and the stance to be taken thereon. While political promises are always taken with a pinch of salt, the new administration would be keen to show continuity and keep their side of the bargain, in a manner of speaking, and would need to spell out its initiatives in some set of new laws regarding the same. This could also be quite disrupting the status quo.

While the new realities get discounted and digested by the markets, it may remain a period of uncertainty for a while. With many variables due for change, monetary policy is also under question, both in the US as well as in India. While higher trade barriers possibly are likely to raise the cost of imports, leading to inflationary trends, this could be a different scenario compared to the current softer stance of the US Federal Reserve. The state of the dollar and global currencies also remain in a state of disequilibrium till these issues are sorted out.

What should investors do?

Longer term equity investors should remember their event horizon and take the current volatility in their stride and not take it as permanent erasure of capital. There are valuation excesses that are unlikely to retain their rich valuations and this risk if adequately diversified away will also not lead to serious loss. However, if investors react to the current volatility - try to asset allocate out of equities currently face twin risks: 1. A realisation into actual losses of what are paper losses for now and 2. A challenging environment on deciding when to re-enter. In both cases emotions play a larger role than logic at each entry and exit.

“A 10% decline in the market is fairly common—it happens about once a year. Investors who realize this are less likely to sell in a panic, and more likely to remain invested, benefitting from the wealthbuilding power of stocks.”

Christopher Davis

These are times where the real growth investors must step up to the plate and believe the multiyear India story, they were enthusiastic about, just a few days ago. A lack of application will rob them of an opportunity to stay invested and any reaction in fear will ensure that they sell low and buy high again in the distant future, at much transactional cost.