The Indian stock markets witnessed a sharp correction in the recent period. There have been various reasons for the continuing sell off which is threatening the bullish stance. The reason of naming this blog as Back To Square One is, the Indian markets have corrected to the tune of almost 15% starting from Jan 2015 which has led to a complete washout of the one year nifty gains. The markets have corrected back to the Aug 2014 levels in the past 9 months. In this blog, we will discuss the reasons of correction, the sharp fall and a bit of prediction of the coming short-term, medium term and long-term expectations.
Markets reached their all time highs during the 2014 period after the NDA govt took over. It was expected to do so in 2015 as well. In Jan 2015, markets were at 9100 levels which was triggered by the first rate cut of the year. But we saw that the markets could not sustain those levels for even a day. The stocks were valued at 24x P/E by that time, which indicated overvalued position and now they have come down to 16x levels. The correction was expected from that time itself. Apart from this, the corporate earnings growth of Q4 was disappointing for the markets. The parliament monsoon session faced a continuous logjam for the entire period thus making the parliament session unfruitful in terms of reforms. This led to further correction in the markets.
While the economy was trying to settle down in April, the Shanghai Index fiasco kicked in. This led to a weak sentiment among the global markets. The Shanghai index corrected sharply by around 30% compared to the past year levels. The Chinese stock market regulator tried everything to curb the outflow post the Grexit fears and hardening of dollar against various currencies, but ultimately failed to recover. China, being one of the fastest growing economy for the past 7 years, started to show signs of slowdown. The FIIs took this as a signal that emerging economies have starting becoming risky because of the high valuations and might correct. With that fear, the FIIs started pulling out hot money from the emerging economies including India. As we know, the Indian markets are driven by FIIs inflows, the outflows starting affecting our index as well. The mutual funds tried supporting the levels of the market by almost equivalent levels of buying, but could not sustain for a long-term period.
The above mentioned facts were for the period up to August 2015. Last two weeks, starting from 22nd August 2015, markets witness tremendous volatility. The volatility was driven by auto sector, IT and Banking. RBI, in the last week of August gave an in-principle nod to 11 payment banks and might declare small bank licenses in the month of September. The payment bank licenses led to the fear of decline in the deposit share of the existing banks. The bank nifty hence corrected heavily with the declaration by RBI. The nifty corrected as well, since banks hold 21% weightage in nifty. The core sector growth on the other hand, slowed down thus indicating that we might have weaker IIP numbers since core sector growth has a weightage of 38% in calculating IIP.
In August last week, Nifty declined by almost 500 points.Most people took this as a crisis situation. Actually the correction was because of the sell off by brokers. SEBI, in its move towards protecting the investors interest, banned 59 brokers from trading on stock exchanges. They further asked the brokers to square off all the positions in the pre-open session next day. Thus, the markets corrected sharply on a single day. It was not the global woes but also the domestic sell off that led to the correction.
The markets so far have indicated that they are now looking for reforms. In the short-term, the markets will eye the China woes and domestic indicators and are expected to be volatile. In the medium term, the markets will hope for a rate cut looking at the current conditions and GST Bill passage and might be on a bullish stance in the medium term. In the long-term, the markets are going to be bullish in nature as India might surpass China and become the fastest growing economy. Markets are now looking for a trigger which will take it back on the bullish path. It is waiting for the RBI to cut rates as well as for some reforms in terms of GST Passage. Till then stay invested is the key here.
Next blog will be an investor education centric article. The question is ” Can your stock picks act as a liquid FD? “. Think about it. Thank you. 🙂