Return of the volatility to Indian Markets

This week we have completed nine months in the calendar year – after a one way upward ride in 2017, we are now seeing significant volatility and valuation corrections in the equity markets.

Let us take a quick look at the market performance, the key events and what we should be doing.

Impact on the Equity Markets

The Indian equity markets saw a correction of 9% this month (we consider Nifty 500 to be more representative of the market than the Sensex or the nifty 50). This is the single largest monthly drop over the last ten years (from October 2008) onwards. Specific sectors were impacted in a significant manner

• From a sectoral viewpoint, the worst hit was banking and financial services (average fall of 14%), and Infrastructure (average fall of 11%). Pharma (down 4%) and Technology (down 1%) were relatively stable
• From a market cap viewpoint while the large cap (6.5% fall in the Nifty 50) corrected, the real fall was in the mid cap (down 13%) and small cap space (down 19%)

This correction has come after a steep rise in the past five years. Even now the Nifty small cap has five year annualized returns of 19% with several funds doing much better.

As always movements in the individual stocks are much more volatile. Various individual stocks have fallen between 35 to 50%( Dewan Housing Finance, Yes Bank, Infibeam, Indiabulls Real Estate, Jet Airways etc.).

What is possibly causing the turbulence in Financial Markets in Sept 2018?

There are some external and some internal events leading to this situation.

• Continued increase in crude oil prices (above 80 USD/barrel for Brent crude) and Indian rupee depreciation against the rupee (INR has depreciated 12% in the last six months)
• Regulatory action by RBI against banks (capping CEO tenure), Bandhan bank (freeze in branch expansion)
• A large financial institution (IL&FS) with total borrowings of Rs.100,000 crores has defaulted on commercial paper
• Federal Reserve interest rate increase by 0.25% and the expected upward trajectory
• Worsening fiscal deficit

What’s the silver lining at this juncture?

As we all know, ultimately in the long run, earnings growth of the Indian companies will drive market returns. The broader economic growth continues to be robust.  The consumption demand has remained upbeat, investment in building capacities have started although in a smaller scale.

A Mint analysisof 1462 companies showed that aggregate net profits rose 22% in Q1 of 2018-19. Bloomberg consensus estimates for the Nifty 50 earnings growth this year is also positive.  This is a silver lining in the horizon.

In fact, the rupee depreciation will give a boost to Nifty earnings (earnings could go up by 3% this year as per Credit Suisse).

While the current quarter earnings will provide additional insights, the micro indicators for various manufacturing industries continue to be positive (e.g. acquisitions by Tata Steel, Amazon in September). Also as and when NPA recognition by banks peak, the pressure on the P&L will ease for these institutions.

Keep Investing and do not stop!

Equity investments are always made keeping long term goals in mind.  In the long term, we want our purchasing power to be protected.

We would like to reiterate the key messages we shared in this blog in Julythis year as well in our earlier newsletters. We would encounter this market volatility during our long-term wealth creation journey and continue to focus on basics (correct asset allocation, risk management and ignoring noise). We cannot stress enough on the importance of not only staying invested but also adding to your investments when the prices fall. Equity investing will continue to remain volatile, while producing long term returns which beats inflation.

Too often in the past, individuals have put in money when the market was at a high and stop their investments at exactly the time the markets fall. This trend is visible already this time also. AMFI data shows that net inflows into equity oriented mutual funds have dropped 60% from 20,000 crores in August 17 to 8,300 crores in August 18.

The ability to ignore the noise and remaining invested for the long term will give us the behavioral edge which helps us achieve superior portfolio returns in the long run!! Easier said, than done 🙁

Continue with your SIPs and STPs, add more, if you can.  There is definitely light at the end of the tunnel.