Dear Reader,
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 since March 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.
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 later part of this year. Its important to note that the volatility in stock market during last 7 months 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.
Major reasons for severe fall in Indian Equities in Jan & Feb 2016
i) Continuous Selling by FIIs - Since beginning of the year, foreign investors have sold shares to the tune of Rs. 17,000 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.
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 since March 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.
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 later part of this year. Its important to note that the volatility in stock market during last 7 months 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.
Major reasons for severe fall in Indian Equities in Jan & Feb 2016
i) Continuous Selling by FIIs - Since beginning of the year, foreign investors have sold shares to the tune of Rs. 17,000 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.
v) Cognizant forecast
slowest Revenue Growth in 14 Years - IT services provider Cognizant forecast
its slowest quarterly revenue growth in 14 years, adding to mounting worries
about clients keeping a tight lid on technology spending. Cognizant, whose
rivals include Indian IT services firms such as TCS and Infosys recently took a
beating due to fear of overall slowdown expected in the IT sector.
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 since March 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.
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 since March 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.
ii) Change in Fed view
regarding US Rate hike - In the
last Federal Open Market Committee (FOMC) meet on March 16-17, the Fed
maintained its status quo on interest rate. FOMC signaled that the future rate
hikes will be on the low gear, indicating only two rate hikes in calendar year
2016 due to tepid global growth compared to consensus in December of four rate
hikes in 2016. This apart, central banks across the world were increasing their
liquidity to support economic and financial activities. The latest data from
China were also showing signs of stabilisation, diminishing fears about the
extent of the slowdown. This is positive for emerging markets to attract
foreign funds.
iii) Continuous Buying
by FIIs post Union Budget - India
remains one of the most favourable investment opportunity for long term
investors considering the fact that India is now the fastest growing major
economy in the world, expanding by 7.3% and cementing its position as one of
the sole bright spots in a flailing global economy. Foreign institutional
investors (FIIs) poured in over Rs 5,000 crore into the Indian equity market in
a matter of three sessions after the Union Budget of 2016, which pushed the
benchmark indices above their key resistance levels.With favourable Union
budget and positive stance taken by FED, FIIs turned to by net buyers pouring
more than Rs. 24,000 crores in Indian Equities in March month, maximum in any
single month since March 2014.
iv) Expectation of a
Rate Cut by RBI - Expectation
of a rate cut by the Reserve Bank of India after a six-month pause has also
heightened the buying frenzy on the Street. India's central bank cut its
repo rate by 25 basis points to 6.50 per cent on 5th April, making a widely
expected first reduction since September to bring the rate to its lowest in
more than five years. But in a surprise move, the Reserve Bank of
India also raised the reverse repo - or the rates lenders charge to the central
bank - by 25 basis points to 6.0 per cent, taking measures to ensure more
availability of cash in the banking system. A cut in the repo rate
means lower cost of funds for the banks. Assuming banks pass on this rate cut
to the borrowers of home, car and other loans, it will help in growing demand
and hence the overall economy.
v) Positive Monsoon
Forecast - After two
consecutive deficient rainfall years, the country is expected to receive good
rainfall this year. The India Meteorological Department (IMD) has
predicted above normal South-West monsoon in 2016. As per IMD, the monsoon
rainfall is likely to be 106% of the Long Period Average. This year the
rainfall is expected to be 6% more than normal, which was 14% deficient last
year. Forecast of above normal monsoon and inflation falling below 5% boosted
the overall market sentiments, uplifting Sensex and Nifty to higher
levels.
vi) Stability in
Commodity Prices - Stable commodity prices, aided by weakness in the dollar, also pushed
risk assets such as emerging market equities higher, adding to the cheer in the
Indian markets. Moreover, highly volatile crude prices also stabilized by
trading between USD 45 - 50 per barrel.
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.
During last week of June, Brexit event has shaken all global markets. However, considering lesser impact on India with significant buying from Domestic Institutional Investors, market recovered sooner than later.
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.
During last week of June, Brexit event has shaken all global markets. However, considering lesser impact on India with significant buying from Domestic Institutional Investors, market recovered sooner than later.
Historical data indicates that most of
the new investors get fascinated towards stock market to make quick bucks and
finally end up loosing their capital as they cant hold on their stocks in case
market corrects and sell out their stocks in a panic. Stock market is not a
money making machine, you need not to be greedy on rising market or fearful
when stock market falls, simply buy right and sit tight having sufficient
patience with you to see your investment growing over a period of time. The
investors who got worried with severe fall in stocks prices early this year and
sold off their holdings thinking to buy the same again at lower levels might be
repenting now by looking sharp rally of more than 25% in all broader indices
during last 5 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 and monsoon prediction goes right.
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 and monsoon prediction goes right.
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, such severe corrections must be considered as buying opportunity to add on good quality stocks at discounted prices.
Happy Investing
Source:Saralgyan.com
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