I completely agree that sudden changes in economics policy will prompt stocks to react–but this is much like how stocks will react to a rumor that there’s an investigation on the CEO of a company (Just an example). And just like the rumor, macro adjustments are better to be ignored in the large scheme of things.
Let’s not forget what Peter Lynch said: “I spend about 15 minutes every year on economic analysis”.
And Risk Premiums are anything but fixed (And no, one cannot ignore local yields and look at the yields of some other country instead), especially in a developing market like India. Here’s the historical Risk Premia for India. The Indian G-Sec’s spread over the US yield (Supposedly the most risk-free rate in the world) accounts for the additional risk and is therefore, locally risk-free.
I simply posit that the value of a stock is always related to how much you can earn elsewhere. In a country of 0% interest rates, I would be extremely happy to earn just 2% on my investments, but that wouldn’t make the underlying stock more risky or less risky. That’s a function of the underlying business itself-- which I’ve attempted to explain in my last post.
Here’s a neat blog post on how stocks tend to correct on the initial news of a rate hike, but actually go on to increase considerably during the rate hike cycle itself (This is in relation to the US markets):