The heightened volatility in markets this year has been the result of alternate bouts of headwinds and tailwinds. Surging crude, rising US bond yields, continuous FII selling and concerns arising out of the IL&FS default were strong headwinds, which took the markets down. Now, some of the headwinds have turned tailwinds aiding the economy and markets. The crash in crude by around 30 percent in 6 weeks is a big positive for the economy and market. The crash in crude has transformed India’s macros for the better: falling CAD, stable exchange rate, softer inflation and falling bond yields are major positives. This tailwind alone has the potential to take the market higher; but politics is likely to be a constraint.
The other major headwind that impacted the market – the rising US bond yield – also has lost some strength recently. The US 10-year bond yield has cooled off from the recent high of 3.26 to 3.05 percent, which, in turn, has not only stemmed the FII outflows, but also reversed it. FIIs are now more bullish on EMs, particularly India. It is important to note that EMs have started out-performing DMs and India has started out-performing EMs.
The Nifty corrected around 15 percent from the peak this year and has now rebounded around 5 percent from the lows. The volatility is likely to continue in the coming days since there are many potential market-moving triggers like the State election results, Q2 GDP data, the outcome of the Trump-Xi Jinping summit and the Brexit talks.
The prospects for the economy and the market are steadily improving and therefore dips will be good buying opportunities. Since the market is fairly valued on 1-year forward earnings, investors can use dips to buy quality stocks. Since mid-and small-caps have the potential to deliver superior returns in FY 20, SIPs in this segment may be scaled up.