Everything is returning to normal in India as the economy opens up post-pandemic. India’s GDP forecast is one of the highest in the world. But that bliss is not destined to last, as Fed rate hikes in tandem with the Ukraine-Russia war deal a double whammy to markets. As global markets tumbled, led by the US Dow falling more than 1,000 points in a day, Indian markets were not immune. Dalal Street, which was already rickety, headed south. From the 17100 level, the Nifty is down almost 7.6% in two weeks.
For most investors, last year’s euphoria was shattered. So now the million dollar question is what’s next? To be realistic, the rise in crude oil prices after the Russian-Ukrainian war led to a further deterioration of already high inflation.The Fed is about to tighten rates, and closer RBI The plunge appears to have been triggered. Predictably, the FIIs evacuated from India to safer havens in the West. The dollar appreciated as expected, putting pressure on our rupee, further widening the gap.
So, does this mean this is the start of a bear market cycle and it’s better to exit the market and stay in the safety of fixed income? Does this mean that India’s growth story is now a myth? Well, it’s always easier to guess after the fact about what might have happened, and predicting what will happen in the future is best left to the crystal watcher. For now, only an in-depth and unbiased analysis of the facts can be a real beacon that can serve as a guide.
Russian-Ukrainian War: The Ukrainian war lasted longer than anyone imagined. Basically, the purpose of waging war has been defeated. As the situation unfolds, neither side will emerge victorious. The war lasted so long because of the support the NATO countries gave Ukraine in terms of arms, money and most importantly moral support. At the same time, it left the country devastated and uninhabitable. The war has caused fuel and natural gas prices to soar and cause inflation worldwide. As long as the war is within the normal range, it has been discounted by the market. When the war ceases, this effect disappears as quickly as it has happened many times in the past. Few examples – the first Gulf War in 1991, the Kargil War in 1999, the Twin Towers attack in 2001, the second Gulf War in 2003, etc.;
Fed rate hike: The Fed rate hike (pronounced RBI hike) was to reduce the liquidity injected by the US government during the Covid-era slowdown. A rate hike will come at some time or another, it’s a given. The market is correcting and will stabilize at a comfortable point from where it will move up again. If the second and subsequent moves occur in an organized manner, then normal stock cyclical market moves occur. The impact of subsequent rate hikes will diminish as one adjusts to the cause and effect of rate hikes and the end of the war in Ukraine. After some time, the counter-cycle will begin as growth will absorb excess liquidity.
inflation:Inflation has two sides – demand-pull inflation and cost-push inflation. Regarding current inflation, the main factors include increased mobility, worker shortages and rising wages, supply chain disruptions and rising fuel prices (due to the war). The last one can be controlled if the government’s policies on fuel costs and taxes are right. Moderate inflation is good for growth, so the RBI is doing the right thing to control it. This inflation is always good for the stock market in the long run.
FII and DII:While FIIs have been withdrawing, DIIs have continued to buy and have been able to prevent vertical declines. SIP has not stopped either, thanks to the patience of educated Indian investors. For obvious reasons, FIIs had to return to the Indian market at some point. Their return would mark a “V”-shaped rally that won’t give retail investors time.
In the last two quarters, despite the headwinds; Indian companies performed above average. Nifty and Sensex are indeed very attractive at current P/E ratios below 20. Leaks in the excise tax collection system were gradually plugged, and excise tax collection reached record levels. Bank NPAs are mostly cleaned up and 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 usually guided by their advisors, and if they invest in stocks, they should keep the following in mind:
* Invest in stocks based on your unique risk profile.
* The minimum period of equity investment should be five years.
* As the market moves up and down, rebalance each portfolio to suit individual risk profiles and horizons.
When investors ignore the above rules, panic and fear take over the decisions that lead to panic selling.
Having said all that, what should investors do now in the current situation? In short – relax, don’t panic, trust India’s growth story and the cyclical nature of the stock market. If the stock market goes down – it must go up. That’s why the once 100-point Sensex and Nifty peaked at 62,200 and 18,600 respectively.
In hindsight, every downtrending market would have been an opportunity that must now be used to invest wisely.
(Akhelesh Bhargava is an independent advisor to Indian Army Veteran, MBA Finance and 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 content without permission is prohibited).