Continue SIPs but refrain from taking large fresh position in equities – Here is why

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New Delhi | Updated: April 11, 2018 2:17:12 AM

Equity markets took a tumble in the month of March as S&P BSE Sensex fell 3.5% during the month on total return basis. Mid-cap and small-cap indices performed worse than the broader benchmark.

sensex, bse, midcap, Foreign institutional investors Consumer durables was the only sector which was positive during the month.

Equity markets took a tumble in the month of March as S&P BSE Sensex fell 3.5% during the month on total return basis. Mid-cap and small-cap indices performed worse than the broader benchmark. S&P BSE MidCap index fell 3.6% whereas S&P BSE SmallCap index was down 6.2%. From the start of 2018, both the indices are down over 10%. This compares to fall of 3% of S&P BSE Sensex in the first three months of 2018.

Consumer durables was the only sector which was positive during the month. FMCG, automobiles and capital goods were among the sectors which performed better than the benchmark during the month. Metals lost the most during the month owing to the US announcing tariff of 25% on steel imports. Real estate and telecom were other sectors, which had notable falls during the month.

Foreign institutional investors (FIIs) were net buyers of $2.02 billion in March. So far in 2018, they have bought $2.12 billion worth of stocks. Domestic institutional investors (DIIs) were net buyers of $1 billion, taking their tally to $3.85 billion in 2018. Mutual funds continue to dominate the DII purchase.

Global equity markets

The key event for global financial markets during the month was 0.25% increase in interest rates by the US Fed. There is a chance of two more rate hikes in 2018 as the US economy has been doing well and unemployment is at a historic low. Taking a cue from the US, EU and Japan could also discontinue easy monetary policy in times to come. This could put pressure on equity prices in emerging markets including India. FIIs may stop buying assets in risky markets and rather earn return in home markets, at least temporarily.

March also saw worries on global trade. The US announced higher tariff on Chinese goods which could impact Chinese exports to the tune of $60 billion. This has led to retaliation by China with tariffs on many US exports to the country,
especially agriculture.

Domestic economy

The macroeconomic scenario has deteriorated for India in the recent past. Inflation has increased to reach 5% level. This is likely to keep interest rates at a higher level. The price of crude oil has also risen and current account deficit is likely to worsen compared to the past. On the other hand, corporate India has been showing better profitability recently which was missing earlier. This, over time, is likely to reflect in stock performance of listed companies.

Barring a few sectors, valuations of stocks are at high levels. While share prices have run up, earning of companies are picking up now only after a four-year hiatus. High level of liquidity globally has driven up stock prices.

Markets have fallen recently and any further correction could make stocks attractive. Over the long term, we remain optimistic on Indian equities. India is likely to grow faster than many countries. Investors can thus expect decent return from equities over a long period in future. Valuations, however, leave moderate upside in the near term. Investors at this point should continue systematic investment plans but refrain from taking large fresh position in equities.

Atul Kumar is head, equity funds, Quantum AMC

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