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 from March to October 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. However in November and December so far, we have witnessed sharp correction in Indian equities mainly on account of developments happened globally as well as locally.
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 March to October this year followed by ongoing correction since beginning of November. Its important to note that the volatility in stock market during this year 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 followed by ongoing correction mainly on account of FIIs buying and selling Indian equities.
Major reasons for severe fall in Indian Equities in Jan & Feb 2016
i) Continuous Selling by FIIs - During Jan and Feb this year, foreign investors have sold shares to the tune of Rs. 26,800 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 from March to Mid Oct 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.
Major reasons for downside correction in Indian Equities during Nov & Dec 2016
i) Selling by FIIs on Global Uncertainties - Although May, June and August months this year saw FIIs pulling out their money from India's debt markets, October was the first month in the current fiscal where they took out money from equity markets. The FII outflows in Oct and Nov can be attributed to the growing global uncertainties and increasing market caution ahead of key global events like the US Presidential elections and the anticipated US Fed Rate hike before year end. FIIs have sold off equities worth Rs. 32,000 crores since Oct'16. (5,770 crores in Oct'16, 19980 crores in Nov'16 and 6,280 crores in Dec'16 so far) However, the removal of overhang of US election outcome with Donald Trump being elected as President of the United States of America and increase in interest rate by Fed with recent correction in market improves the outlook for Indian equity going forward.
ii) Demonetising Rs. 500 and Rs. 1000 Currency Notes - The government’s historical reform of Demonetization on cracking down on black money will be structurally long term positive for the economy, however will a short term negative impact on economic growth due to liquidity crunch across country. The measures may have a short-term impact on industries which are majorly dependent on cash transactions. Industries such as construction, real estate, micro finance, hotel businesses, self-owned businesses, jewellery etc will have a major impact. Hence, we have seen major fall in stock prices of companies linked to these sectors during last one week.
iii) RBI keeping the Interest Rates Unchanged - On 7th Dec, markets had already priced in a 25 basis point rate cut by the central bank while few on the street had also expected a 50 bps cut. But to everyone's surprise RBI maintained a status-quo which lead to a panic sell off in the Bank Nifty as well as Nifty. Within the first two minutes, over 600 points were shaved off from Bank Nifty futures while the Nifty being supported by other names shed close to about 100 points. RBI maintaining same interest rates was mainly on account of uncertainty arising due to Fed policy and rising crude oil prices.
Its important to note that Demonetization to curb black money, fake currency and terrorism is likely to have a long term positive impact on economy. It will have several long term benefits like rise in tax collections, lower inflation, shifting of the cash economy to the banking system, improved banking system liquidity etc. Moreover, we firmly believe that RBI will continue reducing interest rates in coming months to revive economy by boosting demand. As per our estimates, RBI can reduce rates by 75 to 100 basis points over next 12 months. This will augur well for rate sensitive sectors as reducing interest rate cycle will act as key catalyst to drive demand and ultimately growth for cyclical companies.
The investors who got worried with severe fall in stocks prices during Jan and Feb this year and sold off their holdings thinking to buy the same again at lower levels might be repenting later by looking sharp rally of more than 25% in all broader indices in the period of next 6 months.
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.
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, severe corrections must be considered as buying opportunity to add on good quality stocks at discounted prices.
We firmly believe that Indian stock market is going through a correction phase similar to Jan and Feb this year and ongoing market correction must be considered as buying opportunity by long term investors. We believe that its time to start accumulating good quality stocks in staggered way which are becoming available at much 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?
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.
1. Discount up to 30% on combo pack subscription (valid up to 31st Dec'16 only)
2. Portfolio of 10 Small & Mid Cap Stocks for 2017 (to be released on 1st Jan'17)
3. Hidden Gems Flash Back Report - 2017 (to be released in Feb 2017)
4. Value Picks Flash Back Report - 2017 (to be released in March 2017)
5. Existing Portfolio Health Check Up under Wealth-Builder subscription
6. Saral Gyan eBook - "How to Grow your Savings?" worth Rs. 599 for Free.
Below table indicates subscription services and discounted prices valid up to 31st Dec'16.
|CHRISTMAS NEW YEAR OFFER|
|PAY ONLINE |
CARD / NET BANKING
|Hidden Gems||Rs. |
|Value Picks||Rs. |
|Combo 1: HG + VP + WB + 15%||Rs. |
|Combo 2: HG + VP + 15%||Rs. |
|Combo 3: HG + VP||Rs. |
|Combo 4: HG + 15%||Rs. |
|Combo 5: VP + 15%||Rs. |
Click here to know more about Merry Christmas - Happy New Year 2017 Offer.
Hurry! Offer is for limited period and closes on 31st Dec'16 at 11.59 pm.