This bear phase will also end

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The market has turned distinctly weak. Nifty declined sharply by around 6 percent in July and is up by only 1.08 percent for the year till date. The performance of the broader market is far worse than what Nifty indicates. Nifty Mid-cap index and Nifty Small-cap index are down by 11.4 percent and 15.4 percent respectively for the year till date. There have been savage cuts in large number of stocks. But for the 12 to 15 large-caps, the market is in a bear phase. Even though markets are highly correlated globally, India’s performance has been out of step with the global market performance. India is hugely underperforming vis-à-vis other Emerging Markets and global markets.

Why? What should retail investors do in these difficult times?

Let us get the issue in perspective. The immediate reason for the sharp correction in the market is the sustained selling by FPIs, which, in turn, was triggered by the policy mis-step of higher tax on the FPIs registered as trusts. It is unfortunate that the government did not address this issue seriously.

But the bigger problem plaguing the markets is the sharp slowdown in the economy and the tepid corporate earnings. If we take the last 25 years, India’s nominal GDP growth has been around 12 percent and corporate earnings growth has been around 15 percent. But during the last five years India’s corporate earnings have been growing at a measly 5 percent. Corporate profit to GDP ratio, which has been historically at 5.6 percent, is now down to just above 2 percent. This collapse in corporate earnings is the root cause of the problem.

Corporate earnings, like economic growth, do not come in a steady, linear fashion; they come in ebbs and flows. Presently, the downtrend has been prolonged. The expected recovery in earnings has been eluding. And now, we have the slowdown in economic growth and sharp deceleration in segments like automobiles. To make matters worse, the global environment has turned unfavorable with the US-China trade skirmishes aggravating with President Trump’s latest imposition of import tariffs of 10 percent on $300 billion of imports from China, scheduled to take effect from September.

Market history tells us that the best investment strategy is to buy on bad news since bad news will be reflected in stock prices. In these difficult times, investors should remain calm and continue with systematic investment. We feel it is time to nibble at quality large-caps whose prices are becoming attractive. Investors have to be stock specific in this market. Go for quality companies with proven track record and no stress on balance sheets. Investment in mid and small-caps should be done through mutual fund SIPs.

Like all previous downturns, this downturn also will end. Without doubt, investors waiting out with patience will be richly rewarded.

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Chief Investment Strategist, Geojit A highly respected figure in academic circles in Kerala, Dr Vijayakumar is a keen observer of financial markets.He was  Expert Member, Working Group on NBFCs, Planning Board, Govt. of Kerala and has lectured at the CEU (Central European University), Budapest, Hungary as Visiting Faculty in 2006. Dr Vijayakumar is known for his articles and pre or post-budget TV discussions. He regularly addresses Investor Meets organized by the company and offers investment advice to both new and savvy investors.

19 COMMENTS

  1. The BJP govt is also to blame the down turn in financial markets Bad decisions in the budget and no big bang reforms has dented the market Why Nirmala was made finance minister itself is a mystery There were more competent people available Modi has his own style of working he favours persons who obey him till the last Competency is no criteria for him He always has surprises for the people in his team selection the Lok Sabha speaker is an example At present the govt has two priorities article 35 in Kashmir and the Ram Mandir the economy has been given a back seat right now

    • Dear Mr. Suresh Kumar,
      The statement made by you is not correct. The current Govt. is trying to clear the filth accumulated over a period of time. The economy was growing in the past. But, scrapping the foundation. Now, our PM is trying to make it strong and build the economy. You know that surgery is painful than taking an oral medicine. So, please be patient and wait. Regarding the appointment of his favorites, if it is true, it is everywhere. Whom you will appoint if you are in a position to appoint somebody?

  2. From financial astrology perspective, Nifty will recover after Jupiter transitions back to direct motion from retrograde on Aug.8th.

  3. The main point missed by the author is that during the congress regime loans were free for all and no botheration for repayment.So industries prospered with blackmoney and poor tax compliant.With the tightening of loans which NEEDS to be paid back to banks,less loans are taken now and so is industrial activity.Banks were never stronger today as was in the pitiable condition in 2011.Cash circulation in business activity has made it less attractive for the blackmarketers.And there are many other points.

  4. The government’s mis-steps are not only proving costly for investors but also government itself with its planned Rs 105000 lakh crore disinvestment target for FY 2019-20. Besides, when investors are losing money and companies making less profit, where from the government will collect taxes… salaried employees???

    • Except salaries people how many of us are paying the tax in our country? Everybody is looking for the loopholes (which really exist in the system) not to pay it. Still, crying for development and progress.

  5. Government policy to implement tax on super rich trust is theoretically rich, but practically making huge loses to investors. Us China tit tat is not affecting very seriously. But premature policy implementation, without looking the loses of investors.

    • “No gain without pain”. Let the Govt. implement it. Let us see the result later. As you said the rift between US & China will not affect us as predicted and expected as domestic demand for our products are there and will float our economy. So, let us build our economy strong. In turn, you and me will get good returns for our investments.

  6. Market is bound to decline and that is its character. Corrections are healthy for the market. If our investments are based on values it will increase in due course and in long time equity rewards the investor than any other investment. At the same time we should book partial profit when the marked moves continuously without increase in earning of the companies. India is growth story and we should start investing selectively and in small lots when the market is going down. We should also watch macro and micro economic trends. Once USA – China trade war ends the market will go up again.

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