By Akhelesh Bhargava
With the opening of the economy after the pandemic, everything was getting back to normal in India. India’s GDP forecast was one of the highest in the world. But the happiness was not meant to last, as the Fed’s rate hike in sync with the Ukraine-Russia war created a double whammy for markets. As markets tumbled across the globe, led by the US Dow Jones dropping more than 1,000 points in one day, Indian markets could not remain immune. Dalal Street, already a bit shaky, headed south. From levels of 17100, the Nifty fell almost 7.6% in a fortnight.
For most investors, the euphoria of last year has been broken. Well, now the million dollar question is what’s next? To put the facts in perspective, oil prices have risen after the war between Russia and Ukraine, which has worsened inflation, which was already high. Imminent rate tightening by the US Federal Reserve and closer to home by the RBI seemed to have triggered the drop. There has been a predictable retreat of India’s FIIs to safer havens in the west. The dollar appreciated in the expected lines putting pressure on our rupee, thus widening the gap even more.
So does that mean it’s the start of a bear cycle and it’s best to pull out of the markets and stay in the safety of fixed income? Does it mean that the Indian growth story is now a myth? Well, speculation about what might have happened is always easier in hindsight and forecasting what will happen in the future is best left to the glass watchers. For the moment, only a deep and unbiased analysis of the facts can be a true beacon that can serve as a guide.
The Russo-Ukrainian War: The war in Ukraine has lasted longer than anyone could have imagined. Basically, the very purpose of starting the war has been defeated. Neither side will emerge victorious as long as the situation prevails. The length of the war is due to the fact that NATO countries backed Ukraine in terms of weapons, money and, most importantly, moral support. At the same time, it has left the country devastated and uninhabitable. The war has pushed up fuel and gasoline prices, causing global inflation. As long as war is within the conventional realm, the market has ruled it out. As the war stops, the effect will quickly wear off, as it has done many times in the past. Some examples are: First Gulf War of 1991, Kargil War of 1999, Twin Towers Attack of 2001, Second Gulf War of 2003, etc.
The FED rate hike: The US Federal Reserve rate hike (read RBI rate hike) is being done to reduce the liquidity that was injected by the US government during the downturn in the times of Covid. It was a fact that the rate hike would come at some point or another. The market is correcting and will settle to a comfortable point from where it will make a move higher again. If the second and subsequent moves occur in an organized manner, the normal cyclical movement of the stock market will occur. The effect of the subsequent rate hike will be less, as people will adjust to the cause and effect of it, just as if the war in Ukraine ends. After a while, the reverse cycle will begin, as growth will absorb excess liquidity.
Inflation:Inflation has two sides of the coin: demand inflation and cost inflation. Regarding current inflation, the main factors include increased liquidity, labor shortages and rising wages, supply chain disruption, and rising fuel prices (due to the war). The latter can be controlled if the government gets its fuel cost and tax policies right. Moderate inflation is good for growth, so the RBI is doing well to keep it in check. Such inflation will invariably be good for stocks in the long run.
FII vs. DII:While FII has been taking money out, DII has been buying steadily and has been able to avoid a vertical drop. Thanks to the patience of an educated Indian investor, SIPs have not stopped either. At some point, the FII has to go back to the Indian market for obvious reasons. Its return will signal a ‘V’ shaped rally that won’t give retail investors time.
In the last two quarters, despite the headwinds; Indian companies have managed to perform above average. Nifty and Sensex at current PE levels below 20 are really very attractive. The gradual closure of leaks in the GST collection system has seen record levels of GST collection. The Bank’s NPAs have mostly been cleaned up and are ready to lend (with better due diligence), etc.
So while the macro-level outlook will unfold as the tide turns, we as investors need to remember and adhere to the fundamentals of sound investing.
Investors are often guided by their advisers that if they invest in stocks, they should keep the following in mind:
* Invest in stocks based on your unique risk profile.
* The minimum horizon to invest in shares must be five years.
* Keep rebalancing each portfolio as the market moves up or down by realigning with each one’s risk profile and horizon.
When an investor flouts the above rules, panic and fear take over decisions leading to panic selling.
That said, what is an investor to do now in the current scenario? In plain language: relax, don’t panic and believe in India’s growth story and the cyclical nature of the stock market. If the stock market is down, it will surely go up. This is how Sensex and Nifty, once at 100, reached a peak of over 62,200 and 18,600 respectively.
Every downtrend market will be an opportunity in hindsight and one should seize it to invest wisely now.
(Akhelesh Bhargava is an Indian Army veteran, an MBA in finance, and an independent advisor to Beekay Taxation and Investment LLP. The views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproduction of this is prohibited. content without permission).