By Akhelesh Bhargava
With the opening of economy after the pandemic, everything was crawling back to normalcy in India. India’s GDP forecast was one of the highest in the world. But the happiness was not destined to last as the Fed rate hike in sync with the Ukraine-Russia war created a double whammy for the markets. As markets tumbled worldwide, led by US Dow Jones falling over 1000 points in a day, the Indian markets could not remain immune. Dalal Street, which had already been a bit shaky, went southwards. From levels of 17100, the Nifty fell almost 7.6% in a fortnight.
For most investors, the euphoria of last year was broken. Well now the million-dollar question is what next? To put facts into perspective, crude oil prices have climbed up following the Russia-Ukraine war, causing the already high inflation to worsen. The imminent tightening of rates by US Fed and closer home by RBI seemed to have triggered the plunge. There has been a predictable pull out by the FIIs from India to safer havens of the west. The dollar appreciated on expected lines putting pressure on our Rupee, thereby, further widening the gap.
So, does it mean that it is the beginning of a bear cycle and is it better to pull out of the markets and rather stay in the safety of the fixed incomes? Does it mean that the Indian growth story is a myth now? Well, speculation on what could have happened is always easier in hindsight and forecasting what will happen in the future is best left to crystal gazers. For the present, only a deep unbiased crunching of facts can be a true beacon that can serve as a guide.
The Russia-Ukraine War: The Ukraine war has lasted more than anyone would have imagined. Basically, the very purpose of starting the war has been defeated. Neither side will be victorious as the situation prevails. The duration of the war lasting this long is due to NATO countries providing Ukraine backing in terms of weapons, money and most importantly moral support. At the same time, it has left the country devastated and uninhabitable. The war has sent the fuel and gas prices soaring leading to inflation pan world. As long as the war is within the conventional realm, it has been discounted by the market. As and when the war will stop, the effect will wear off quickly as has happened many times before in the past. Few examples being – 1991 Gulf War 1, 1999 Kargil war, 2001 Twin tower attack, 2003 Gulf War 2, etc;
The FED Rate Hike: The US Fed rate hike (read RBI rate hike) is being done to reduce the liquidity which was pumped in by the US Government during the slowdown in Covid times. It was a given that the rate hike will come in some time or the other. Market is correcting and will settle at a comfortable point from where it will make an up move again. If the second and subsequent move comes in an organised manner, the normal equity cyclical market movement will happen. The effect of subsequent rate hike will be lesser as the people will adjust to the cause and effect of it as well as if the Ukraine war ends. After some time the reverse cycle will start as the growth will absorb the excess liquidity.
The Inflation:Inflation has two sides of the coin – demand -pull inflation and cost-push inflation. In regards to current inflation, the main factors include the increase in the liquidity, worker shortages and rising wages, supply chain disruption and the fuel price rise (because of war). The last can be controlled if the government gets its policies right related to fuel costing and taxation. Moderate inflation is good for growth so the RBI is doing it right to keep it under control. Such inflation will invariably be good for the equities in the longer run.
FII versus DII:While FII have been pulling out money the DII have been buying consistently and have been able to prevent a vertical fall. Thanks to the patience of an educated Indian investor, the SIPs have not been stopped either. At some point the FII have to come back to the Indian Market for obvious reasons. Their return will signal a ‘V’ shape rally which will not give time to retail investors.
In the last two quarters, despite the head winds; Indian companies have managed to perform above average. Nifty and Sensex at current levels of PE below 20 are indeed very attractive. The gradual plugging of leakage in the GST collection system has seen record levels of GST collection. The Bank NPAs have been mostly cleaned up and they are ready to lend (with better due diligence in place), etc.
So while the outlook at the macro level will unfold as the tide turns, we as investors need to remember and abide by the fundamentals of sound investing.
The investors are often guided by their advisors that if they invest in equity, they should keep the following in mind:
* Invest in equity as per your unique risk profile.
* Minimum horizon for investing in equity should be five years.
* Keep rebalancing each portfolio as the market moves up or down re aligning to one’s risk profile and horizon.
When an investor flouts the above rules, panic and fear takes over leading to decisions that lead to panic selling.
Having said this, what should an investor do now in the current scenario? In simple language – relax, do not panic, and believe in the Indian growth story and cyclical nature of the equity market. If the equity market has gone down – it is bound to come up. That’s how the Sensex and Nifty which were at 100 once upon a time reached a peak of over 62200 and 18600 respectively.
Every down trend market will be an opportunity in hindsight and one must make use of it to invest wisely now.
(Akhelesh Bhargava is an Indian Army Veteran, MBA Finance, and an Independent advisor for Beekay Taxation and Investment LLP. Views expressed are personal and do not reflect the official position or policy of Financial Express Online. Reproducing this content without permission is prohibited).