Stock prices were on rise till March last year and we have seen significant increase in retail investors participation compared to previous years. However in beginning of this year, with lot of pessimism building around equity market globally, we have seen a severe correction in Indian equities in the month of Jan and Feb this year with major indices - Sensex and Nifty falling by more than 24% from all times high made in March last year. If we look into broader markets, stock prices of many mid and small cap companies have seen a steep fall in the range of 30% to 50% or even more in first 2 months of 2016. In such situation every investor looking to create wealth is confused whether to exit, hold or enter the stocks and at what levels to enter or exit.
Later since March this year, we have witnessed strong rally on positive global as well as local cues. Major indices, Sensex and Nifty have risen by more than 25% from their lows made in last week of Feb this year.
Being an equity investor, its important to understand what exactly has caused severe fall in Indian equity market in Jan and Feb 2016 and sharp rally during later part of this year. Its important to note that the volatility in stock market during last 7 months is mainly because of changing sentiments of investors towards global as well as Indian equities.
Below are the major factors which initially hurt and later boosted sentiments of equity market in 2016.
Major reasons for severe fall in Indian Equities in Jan & Feb 2016
i) Continuous Selling by FIIs - Since beginning of the year, foreign investors have sold shares to the tune of Rs. 17,000 crore. With continuous redemption pressure from sovereign wealth funds of the middle east, China woes in terms of sustaining growth, dampening global sentiments led to sell off in emerging markets. Investors who were sitting with hefty profits and invested in Indian stocks during last 18 months also started selling to book profits against falling rupee. Moreover, signs of recovery in the US economy has also resulted in funds travelling from Asian markets back to the US markets.
ii) Slowdown in China Economy - China, world's one of the fastest growing and 2nd biggest economy has shown signs of slowdown. There was a panic because of China's continuous poor manufacturing growth. Moreover, fall in crude prices due to oversupply of oil, fall in base metals prices due to sluggish demand not only hurting China but all the stock markets of the world resulting in major sell-off in markets in US, Europe and Asia.
iii) Weak Corporate Earnings - For any stock market to deliver good returns, it is very important for the earnings of the companies to match its valuations. But in last 18 months, the valuations of India Inc has sky rocketed but the earnings were not seen at par. This was the major concern of the investors and thus we have seen profit-booking in last year and now facing the heat due to redemption pressure in emerging markets from the global funds.
iv) Delay in Reforms took off the Premium - There was lot of expectation from Modi led NDA government with major announcement made to bring reforms by passing two major reform bills - the goods and service tax (GST) and the Land Acquisition Bill. Given the build-up of political opposition to his government, there was more than a fair chance that two major reform bills will not get passed which further impacted Investors sentiments in terms of future growth outlook of Indian economy, this took off the premium valuations which India had last year compared to other emerging markets.
vi) Surge in Bad Loans of PSU Banks - A significant surge in bad loans and provisions hurt PSU Bank stocks. Its important to mention here that the Reserve Bank of India recently directed banks to reclassify loans and set aside more money against stressed assets. The central bank has set banks a deadline of March 2017 by which time it expects banks to recognize stressed assets and make adequate provisions to cover them.
Major reasons for sharp rally in Indian Equities since March 2016
i) Positive Union Budget with Focus on Fiscal Discipline - Overall market sentiments turned positive as government decided to stick to its fiscal consolidation road map despite the pay commission, targeting 3.5% of GDP in FY17, the third lowest fiscal deficit in 40 years. Moreover, another major positives for equity market were no increase in the service tax, which was speculated to rise by 2 percent and also no change in capital gains tax.
vii) Passage of GST Bill - The Constitution amendment bill for roll-out of GST was pending in Rajya Sabha for a long time and the government was keen to see its passage. The Goods and Services Tax seeks to bring a uniform tax structure subsuming a number of imposts and the government claims that it will help add 1 to 2 per cent to the country's GDP. Stock market gathered pace considering reports of discussion between the Congress and the government which fueled hopes that the crucial Goods and Services Tax (GST) Bill is likely to be passed soon. Further, the progress of the monsoon in the country with good rainfall so far also aided market sentiments.
During last week of June, Brexit event has shaken all global markets. However, considering lesser impact on India with significant buying from Domestic Institutional Investors, market recovered sooner than later.
We always suggest our members not to time the market and follow a disciplinary approach while investing in equities with medium to long term perspective. Its important to know, whether you would be able to hold on your positions in case stock market tanks? We believe market has already bottomed out in February this year and any significant downside going forward must be considered as buying opportunity. We may not see Feb lows again, indices are expected to move much higher from current levels during next one year if there is no negative surprise on global front and monsoon prediction goes right.
Smart investors do not listen to the herd and take a rational approach with their wise & intelligent thinking. As rightly quoted by Warren Buffett - Be Fearful when Others are Greedy and Greedy when Others are Fearful. At the point of time when Nifty closed below 7,000. We started listening majority of TV analysts and media person giving target of 6,300 with another 10% downside. It was the time to invest rather than waiting for another 10% downside. We do not believe in timing the market and always advice our readers to take a systematic approach while investing in equities with a long term horizon. Moreover, such severe corrections must be considered as buying opportunity to add on good quality stocks at discounted prices.
We would like to update our members that we published article titled Know your Risk Tolerance While Investing in Equities dated 11th Feb'16 informing our readers to start accumulating good quality stocks and do not try to time the market.
Below are the few paragraphs worth reading from the same article:
If Sensex hits 22,000, in that case its price to earnings (P/E) multiple will be similar to what it was during the time of Lehman crisis in 2008. That was a stressed situation with lot of fear among global as well as domestic investors like today, The average six-month P/E on a one-year forward basis for the Sensex was 14 times after the Lehman crisis and if we keep the same earnings multiple on FY17 earnings estimates, it gives a target of 22,000 on the Sensex which means correction of another 4-5% from current levels. But we do not want to set any target here, it is just an estimate, Sensex may bottom out around 22,000 levels or it may go down to 21,000 i.e. 30% correction from all time highs made in March 2015 or it may rebound from current level of 23,000.
With every fall, Indian equities valuations are getting attractive day by day. Moreover, once the markets bottom out and form a base, we can see renewed buying interest from global investors. Moreover, upcoming budget can boost the sentiments of investors, hence its time to start accumulating good quality stocks which are now becoming available at discounted price.
We always suggest our members not to time the market and follow a disciplinary approach while investing in equities with medium to long term perspective. Its important to know, whether you would be able to hold on your positions in case stock market tanks?
Considering the fact that with every fall, Indian equities valuations were getting attractive day by day. We released 6 Stocks to Buy / Accumulate Report under Hidden Gems Rand Value Picks subscription on 21st Feb and 7th March respectively, suggesting our members to add on / increase allocation in these stocks in their portfolio. It was the right time to accumulate good quality stocks which were available at much discounted prices.
Time has shown that smart investors have made their fortune by investing in equities in long term. None other asset class can match giving you such extra ordinary returns. Yes, its important for you to invest in right set of companies at right price with medium to long term perspective. If you think to invest in stocks for period of 3 months or 6 months, we suggest you to stay out of stock market because you are not investing, you are betting on volatility of stock market which could be risky.
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