The Indian equity markets have fallen 5.7% in the last one month and the Nifty is down 7% from an all-time high of 26,277.35 on the back of sub-par corporate earnings and China’s stimulus push. Well, let’s pause and take note of the stupendous run thus far. From last Diwali to current levels, the Nifty has run up from levels below 19,000 last November to levels above 26,270 in September. Barring a few pauses in between, that’s a 38% plus upmove in less than a year.
While the markets take a breather, let’s probe if there is any reason to worry? “It is the correction phase,” said Ajit Mishra, Senior Vice President of Research at Religare Research. Well most analysts say this is more of a deep correction and till the time the Nifty sees a correction more than 10%, it isn’t really a bear zone.
Why are markets falling:
Earnings concerns: The IT sector earnings fell a bit short of expectations in the second quarter hurting the markets. TCS, the largest IT services company’s net profit came below the street’s expectation. Infosys reported a net profit of Rs 6,506 crore but was below the estimates of Rs 6,700 crore. “Disappointing start of earning season are the key reasons,” added Mishra.
China Factor: China’s economic stimulus to revive its economy isn’t playing well for Indian markets. The People’s Bank of China has slashed the five-year loan prime rate (LPR), a key lending rate in China, to 3.6% from 3.85% and the one-year loan prime rate to 3.1% from 3.35%. This is instrumental in redirecting a lot of foreign flows to China. “China is recovering, incrementally global investors are moving there,” said Sunil Jain, Senior Vice President of Derivatives and Alternative Research at Elara Capital.
West Asia on fire: The ongoing conflict in West Asia between Israel and Iran has impacted sentiment too. Typically, we have seen in such cases that the funds are diverted to safe-haven investments like gold. Crude prices too have been tumultuous as a result and overall sentiment has been muted.
US Election: Investors are on the edge ahead of the upcoming US Presidential elections. The market mood is divided between the implications of a democratic and republican win. While a strong win by the Republicans would mean that there could be a larger increase in trade tariffs in combination with fiscal stimulus, democrats coming to power may indicate .major changes in tax policy and social benefit policies.
Dollar strength: The US dollar is riding on expectations the US Federal Reserve will take a measured approach to easing its policy. Additionally, the dollar’s strength is boosted by rising Treasury yields. Pressure on the yen, euro and sterling also added to the dollar’s strength and this kind of impacted the mood in the Indian market.
What can retail investors do?
The fall, most market observers believe, may continue for a while as there is “no sign of rebound still”, pointed out Mishra of Religare Broking. “The markets are in a correction phase led by small and midcap stocks because this is where the froth is,” highlighted Sunil Jain, Senior Vice President of Derivatives and Alternative Research at Elara Capital.
So what should be your strategy now? Long-term and reliable investment options are the safest way to go. Investors must avoid mid and small-cap counters that have seen sudden spurts in the short time. “The stocks which were driven by the inflow of thematic funds and sectoral funds created massive euphoria in a set of stocks like defence, infra, PSU, etc. in the previous 6-7 months. If thematic flows stop or turn bad then these pockets are likely to face the music, said Jain of Elara Capital. The markets were at a rich valuation in certain pockets and this decline has eased that concern to some extent now,” Mishra advised. “Investors can selectively look to invest with a long-term horizon,” he added.