Marina Wealth – Election Season Market Update – November 2024

2024 has been the biggest ever election year, with 3.7 billion voters (half of the world’s population) having a chance to vote in more than 70 countries. The recent US presidential election was keenly followed, and a decisive mandate has been given by the voters.

The Indian equity markets have had a dream run after the initial fall due to COVID on March 20. From those levels, the Nifty 50 has grown by more than 250% in the last four years. Accompanied by strong corporate earnings, several individual themes have done even better.
Reversing this trend, the markets have started seeing a correction from the end of September onwards. While the broader market has corrected around 9%, individual stocks have corrected more.

Is this the start of a broader correction, or is it a blip on the horizon? Should investors start making changes to our portfolios? Today we will look at this in more detail.

Current state of the Markets
In the long run, markets always follow corporate earnings. As always, let us look at the three lenses of valuations, earnings growth, and liquidity

Current Valuations: Where are we with regard to the overall market valuations?

• At current Nifty levels, the market is trading at 21 times forward earnings (the 15-year average is around 19). So, the Nifty is trading only marginally above long-term averages. However, both the Nifty Midcap (at 31 times forward earnings) and Nifty Small Cap (23 times forward earnings) are trading much higher than their historical averages. So, investors must be cautious in these segments. If the Nifty corrects as anticipated, then valuation-wise it becomes more attractive. Particularly areas like private sector banks, FMCG, IT, and pharma have gone through time correction recently.

Corporate Earnings Growth: Are the earnings of the companies growing?

• Growth in corporate earnings has been the biggest catalyst for the bull market in the last four years. Profit after tax has grown more than 250% post-March 20. However, this is also the biggest concern for market analysts now. After years of such strong earnings, the recent quarter has been a disappointment, with several companies reporting subdued growth.
• While we need to wait and see how the full year shapes up, high earnings growth on such a high base will not be easy going forward. However, the second half is shaping up to be a strong half for companies with increased government spending (paused due to elections in Q1), festive season (48 lakh weddings have been planned across the country in November/December), etc.

Liquidity: Is there sufficient liquidity in the markets? How are the flows from domestic retail and institutional investors? How about FII investments?

• Over the last four years, retail investor participation in the equity markets has increased dramatically. Monthly mutual fund SIPs at the industry level have crossed Rs 25,000 crores. On October 24, when there was a drop in the markets, retail investors infused more than 40,000 crores in equities via mutual funds alone.
• Robust flows are happening through EPFO, insurance companies, and the cash holdings in various schemes are providing excellent liquidity buffers to the markets.
• Foreign investors have withdrawn money several times post-COVID. This has been counterbalanced by the domestic inflows. Recently, they have withdrawn more than 100,000 crores in October/early November. This is the highest ever withdrawal by FIIs. Contrary to expectations, a lot of this money has flown to Japan. If this continues, it will dampen the sentiments in markets.

Learning from History
Is this market fall a rare event and how does it impact long term returns?

1. Intra-year falls in markets are common and are unavoidable
   1. Market falls are common and cannot be avoided. In the last 20 years, 17 years have had intrayear market declines of more than 10%! Within each calendar year, 10-20% corrections are very common.
2. Long-term returns continue to be positive despite market falls
   1. Over the same 20 years, the Nifty has given 12X returns despite such intra-year falls. The markets have recovered from the fall in the past
3. Increasing the duration of holding reduces the volatility in returns
   1. When held for more than 6 years, the Nifty has never delivered negative returns and has given double-digit returns 85% of the time
4. In the long run, revival in corporate earnings is the key
   1. Earnings growth estimates for FY26 will be vital for strong market returns.
   2. The long term growth projections for the Indian economy continue to remain strong and corporate earnings will continue to grow

Such market corrections are healthy and essential for the markets. It removes froth from different segments (for e.g., thematic like shipbuilding, defense, etc. had run up so much earlier this year and they have seen a healthy correction). In the absence of such corrections, bubbles tend to build up in markets.

What should Investors be doing now?
We would like to reiterate that we should continue to hold on to our time-tested investment principles, and this time it is no different.

1. Maintain the right asset allocation: Asset allocation continues to remain paramount. Investors should avoid overexposure to mid/small caps. Also, the overall asset allocation to equity should not run up beyond target limits.
   If the equity allocation % has increased a lot, then this is a time to lighten holdings in that segment. This is also a good time to add money in fixed income and gold/silver through tax-efficient investments.
2. Diversify within the Equity Portfolio: Within the Equity Portfolio, concentration on individual stocks or a single theme increases the volatility. A diversified portfolio across market caps and investment factors results in a truly diversified portfolio.
3. Moderate Return Expectations: As reiterated, the markets have had a dream run post-covid. It would be good to moderate expectations in the short run. We often come across investors who are happy with “even” 20% returns per year! In fact, 75% of the investors in Indian markets have started investing post-April 20 and have never seen a market fall. Historically, Indian markets have given 12 to 14% returns over long periods of time, which comfortably beats other investment avenues and inflation.
4. Avoid trying to time the market: It is important to stay invested in the market. Trying to time the market by selling and buying at lower levels has not worked well in the long run. It is behaviourally hard to invest the money at a higher level.
5. Good Entry Point for New Investors: Several investors had stayed away from the markets or remained underinvested in equity due to fears of correction, valuation concerns, etc. The recent dip offers a good entry point. Staggered entry into the broader market during such dips has produced healthy returns.
6. Check and ensure that you have sufficient liquidity to fund short-term goals. If investors have any short-term goals in the next 1-3 years for which money is parked in equities, then this is a good time to re-allocate and move to safer assets in the non- equity space.
7. Stay calm and ignore the noise. Investors should remain calm and embrace volatility, as that helps to meet our long-term goals.

We would like to conclude by saying that such market corrections are healthy and they prevent market bubbles. It is important to moderate our return expectations and to stay invested for the long term, ignoring the market noise.