Don’t be overly concerned about the market correction

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We should not be excessively concerned about the ongoing correction in the market since a consolidation has been        anticipated during the last three months. An investor who has adjusted his/her portfolio and has moderate expectations need not be concerned about the correction. The current view remains the same as elaborated in the article ‘Time to transform your equity  portfolio’. 

We do not expect a deep fall in the market, if there is no profound change in global factors, which seems unlikely. We expect this consolidation to continue for a period of 1 to 3 months or a price range of 7% to 15% for an index like Nifty 50 from the recent high. During this phase, if an investor has a strong portfolio in-line with the upcoming sectors as we have been discussing, then he/she will be able to overcome the challenge. In this article, let us review and discuss the latest factors which led to the extension of the negative trend and its possible level of impact in the future.

1. Foreign brokerages and investors have turned cautious

In the last one-year, the Indian market has been outperforming the global market supported by corporate tax reforms, economic reforms, good handling of  Covid-19, high quality of IPOs, re-opening of the economy, rising global demand and high retail inflows. All these factors led to strong foreign institutional investor (FII) and  Foreign Direct Investment (FDI)    inflows supported by an easy money policy. However, in the last one-month, India has started to underperform compared to the rest of the world due to higher FII   selling in the secondary market. The cautiousness of foreign investors and brokerages is based on the thesis that the current valuations of the Indian market compared to peer countries are excessive, leading to a downgrade in the equity market outlook. India is trading at a one-year forward P/E of 21x, which is at the upper-band range with a low of 13x, a high of 23x and an average of 18x over a five-year period.

2.  High Wholesale Price Index (WPI)

India’s WPI in October spiked to 12.54% from 10.66% in September owing to the rise in prices of petroleum products, raw materials, and manufactured products. WPI impacts corporates more on a short-term basis. It can be considered as a lead indicator of a change in the cost of operations and sales. High cost and delay in price hikes are impacting the operational/EBITDA margin of companies, lowering the profitability, which is negative. It is leading to a downgrade in earnings for sectors that are heavily into manufacturing. Similarly, the overall inflation is also above the market forecast. India’s CPI rose to 4.48% from 4.35% led by a surge in food prices. Globally, the rising inflation rate is forcing investors to remain sidelined. UK’s annual inflation rate stood at 4.2% in October from 3.1% a month ago, and US inflation hit a 30-year high level of 6.2% YoY. 

3.  Paytm weak listing and trading

It is a big sentimental setback for the Indian market which was thriving on a strong primary market in 2020 and 2021. This was supported by the high quality of new offers and listing gains. The deep discount listing and trading of India’s largest new generation fintech company will be a drag on the Indian market during the coming months. It will also impact the upcoming  offerings and trend of retail inflows which has been a key factor during the pandemic period.

4. Withdrawal of the three agriculture laws

This too is a big setback because the Indian equity  market was booming and trading at a premium to EMs based on the new reforms being consistently announced by the government. The farm laws were expected to improve farm efficiency and bring about prosperity to the rural economy. In the short to medium-term, this rollback will affect the reformist tag of the  government which provided an edge to the Indian market to trade consistently above the peers in terms of valuations. It is feared that this rollback may be an indication that the government may not be as reform-oriented as it has been. 

5. Global market is cautious too

A surge in fresh Covid cases in parts of Europe is   keeping global investors on the edge, fanning fears of an economic slowdown. Also, the two key central banks – FED and ECB – will be holding policy meetings in  December and January, which will decide the tone of tapering and monetary policy for 2022 and 2023. Easy money policy has been one of the main reasons for the rally during the pandemic. Hence a rise in the interest rate and fall in liquidity will impact equity markets globally. EMs which are highly dependent on FIIs inflows may be impacted more. RBI’s observation that equity market valuations are stretched is also adding pressure to the domestic market.

Concluding View

The Indian stock market has had an impressive run in 2020 – 2021. As discussed, the law of averages will moderate the future return. Once the market completes its consolidation phase, we can expect the market to move towards new highs. 

We do not anticipate a deep fall in the market because the economy will be supported by fiscal expansion and accommodative monetary policy and help to sustain at modest to average interest cost level. Consolidation will be healthy for the market on a long-term basis and will help it to prepare for the next rally.  

On a near to medium-term basis, investors should focus on defensive sectors in anticipation of higher market volatility with a balanced portfolio. Promising sectors are domestic focus companies, capital goods due to the fiscal push, tourism, power (renewables), and manufacturing sectors that are bound to benefit from the further reopening of the economy.

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Head of Research, Geojit Vinod Nair holds a Bachelor of Commerce degree and CFA (India). He has rich experience in equity research and comments on news impacting equity markets in India. In addition, he shares his views on Union Budget, Government policies, reforms and any developments which impact equity investment in India and market outlook.

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