Note on the market fall – February 2016

The Indian stock markets fell continuously for almost the whole of last week and there is now anxiety all around.  It is natural to feel little jittery on account of this fall as an investor.  There are number of reasons which were attributed to the fall and key among them are:

• slowdown in the Chinese economy
• threat of deflation in developed markets
• falling crude oil prices
• poor corporate results in India
• high NPAs reported by Indian Banks and
• the possibility of lower growth in the Indian economy

Let’s take this opportunity to do a check on how things have shaped up in the Indian context.

1. Our macroeconomic parameters like Fiscal deficit, CAD are lower than what it was couple of years ago. The Government has retained majority of the gains on oil price fall in the form of higher taxes which will help to spend on infrastructure (positive)
2. The oil prices have fallen massively which is largely beneficial for India. At the same time, it is creating troubles for oil dependent economies which will put more pressure on remittances and investments (neutral)
3. The Govt is spending or budgeted to spend massive amounts in infrastructure growth. This is expected to trigger a wave of economic activity and provide the much needed push towards economic activity (positive)
4. The bad assets problem in this Indian banking industry is being acknowledged and necessary actions are taken to rectify the system once for all.  There is also talk of banking reforms which will only lead to further strengthening the banking system (positive)
5. The Govt is taking steps to bring in additional jobs through Make in India, Skill India and Ease of doing business, which can bring in higher foreign direct investment in to India (positive)

To put it simply, the Government is doing its mite to propel the economy. But the current sell off what we see is not due to domestic factors but more to do with the global situation.  Foreign Institutional Investors (FIIs) are selling to meet their redemption needs.  As long term investors, we should take advantage of this situation and start investing in Indian equities.

As long term investors, we all know that markets are slave to corporate earnings.  If the earnings grow, markets will continue to grow.  But the corporate earnings growth has slowed down at a broad level and it is getting reflected in the subdued sentiments in the stock markets.  We expect the earnings to pick up in the next couple of quarters, thanks to low base effect.

The logical question is when the correction in the Indian market will stop. The honest answer is not known to anybody. Only in hindsight, we may be able to tell that we hit the bottom on a particular day.   The markets may continue to remain volatile in the near term in tune with the latest global developments.

We are getting a good opportunity to buy for the long term.  After the fall, the NIFTY Price Earnings multiple has fallen below 19 times, making it attractive for the long term investors.  With the expected earning pick up in Quarter 3 and 4 of this calendar year.

• As most of you are investors through the Monthly Systematic Investment Plans (SIPs), you should continue with your SIPs as you are getting the units at a good discount.
• If you have surplus cash and which you don’t need for the next 5 years, then increase your allocation to equities in a systematic manner.
• If not, just stay invested and you will not regret.

Please remember that you have adequate liquidity and maintain the asset allocation you are comfortable with.

I want to end with the famous quote of Warren Buffet, which is apt for this situation.

“Buy when others are fearful”.

Please feel free to reach out to me if you need more information.