In his book Alchemy of Finance, Hungarian billionaire investor George Soros puts forth an interesting concept called the ‘Theory of Reflexivity’. According to this theory, markets are reflexive. So, the beliefs held by investors tend to affect the fundamentals of the market and vice-versa. This reflexive mechanism forms a powerful feedback loop which can cause positive or negative outcomes, depending upon the herd or the collective thinking.
This theory, perhaps, could be the answer to the mayhem that the stock markets have witnessed over the past couple of days. Along with global markets that went on a downward spiral, India too saw its benchmark indices, Nifty and Sensex, falling by 8% each on March 12. The next day, the exchanges oscillated between hitting the lower circuit in the early hours to ending 4% (Sensex) and 4.5% (Nifty) higher after trading was halted for the first time in 12 years.“Have we ever seen something like this before? My memory doesn’t help me. Reasons for this volatility are very different from what we have seen in the past. Real world and real economy concerns led emotions are ruling the markets,” says Nitin Bhasin, head of research-institutional equities, Ambit Capital.
Bhasin’s statement is validated by the India VIX, a measure of investors’ risk perception, which rose by 22% in just a week to 80. Moreover, foreign portfolio investors (FPIs) have already pulled out Rs.543 billion from the Indian capital markets this month, as on March 24. The latest pandemic has wreaked havoc on markets around the world as the MSCI All Country World Index shows a 30% fall from January 2020. In comparison, during the other disease outbreaks in recent times, markets did not react as sharply (See: Deadly diseases).
This emotional roller-coaster is courtesy Covid-19, termed a pandemic by World Hea