In fall season

As market heads downwards on global and local worries, falling valuations keep the spirits up for investors

In fall season
In fall season

A near $1 trillion global equity selloff  last week, triggered by growing fears about rising interest rates and trade war between the US and China, have rattled investor confidence.

Markets across the globe saw a meltdown in equity as investors tried to keep risk off the table in the uncertain times.

Fireworks have begun in the India market as well. The benchmark indices have lost 10 per cent from their record highs in end January. The Sensex, which had touched a record high of 36,283 on January 29, shed close to 3,600 points since then to close at 32,596 on Friday while the Nifty lost 1,132 points from its all-time peak to close below the crucial 10k mark.

The big question is what should investors do now? While some analysts advise investors to take cover, the others say valuations are only getting reasonable for long-term investors.

“Volatility has returned to the market and stocks have corrected quite sharply. It is good news for long -term investors, as they are able to buy stocks at cheaper value,” says Gautam Sinha Roy, senior vice president, Motilal Oswal Asset Management Company.

However, it is expected that fear factors may keep the market side ways for some time.

The biggest of them is the notion that the days of cheap money are over, as interest rates are set to rise globally.

The US Fed has raised benchmark lending rate by 25 bps last Wednesday in line with market expectations.

It is expected that there will be at least three more rate hike this year and the US interest rate will touch 3.5 per cent by 2020.

This does not auger well for equity markets, especially in emerging markets, which have seen huge inflows over the past few years.

Another worry is the likely impact of a trade war between the US and China. President Donald Trump slapped tariffs on $50 billion worth of Chinese goods on Thursday and China retaliated, rather mutely, by imposing new levies on just $3 billion of US goods.

But for India things are compounded by other worries too. Apart from the prospects of escalating trade wars, the investor sentiments are hit by the rising crude oil prices, the ongoing turmoil in the banking system as well as the uncertainty on the political situation.

"Sentiments were affected by rising crude oil prices, bond yields and problems in the domestic banking sector,” said the head of research at a leading domestic brokerage.

The  surge in crude oil prices have also impacted the market sentiment. Crude oil prices rallied more than 5 per cent last week despite the turmoil in global equity markets on trade war concerns. The upside was after the Saudi energy minister Khalid al-Falih said the Opec members would need to continue coordinating with Russia and other non-Opec oil-producing countries on supply curbs in 2019 to reduce global oil inventories. Brent crude futures closed the week at $70.4 per barrel and US crude futures settled at $65.88 a barrel.

Global analysts expect less impact of a trade war on crude oil as they feel there could be healthy demand going forward. Morgan Stanley expects Brent crude oil prices at around $75 a barrel by July-September this year while Goldman Sachs sees prices at around $82.50 a barrel by mid-year.

This could be painful for oil importing countries like India, as any sharp increase in oil prices impact fiscal deficit and pushes up inflation.

The rupee witnessed a volatile move ahead of the Fed rate hike and on concerns of a global trade war. The local currency weakened by eight paise to close at 65.01 against the dollar on Friday.

Some foreign brokerages have also changed their stance on India. Morgan Stanley and CLSA have reduced their weightages on India in their portfolio, citing earnings disappointment. Morgan Stanley has reduced its overweight stance on India to 50 basis points from 150 bps.

The market is also concerned about the political developments in the country. Marketmen have has started worrying about the 2019 general elections, where the ruling NDA may find it difficult to stage a comeback.

The election calendar, the impact of higher oil prices and the prospect of higher fiscal deficit are all hurdles before the market besides steep valuations, said Morgan Stanley. Several key states go to the polls this year ahead of the general elections in 2019.

However, Morgan Stanley says “quantitatively, India ranks well on a fundamental basis”. But it says “valuations are not particularly cheap (especially on a price-earnings basis), and earnings estimate revisions, while near record highs for India, are now lower relative to regional peers.”

Technically also things are encouraging. The Nifty 50 has decisively penetrated 200 EMA (exponential moving average) with low velocity. On a worst case scenario, Nifty can touch 9,700 at the lower channel of the downward sloping trend line (red).

Chartists say the Nifty50 has a strong previous support at 9,700, which shall be a powerful reversal point for the index going ahead.

“The current degree of pessimism in the market warrants a reversal, albeit of a shorter term in nature. However, with the fears of trade war aggravating and the political climate heating up domestically, there is bound to be acute pressure on the bulls from a medium-term perspective,” said Jimeet Modi, founder & CEO, Samco Securities. “Year-end liquidity crunch would keep investors at bay but beginning the new financial year liquidity should improve and the same would be reflected in the market, too. Mutual fund inflows on account of ELSS should boost their buying power, thus, lending support to the market. Investors should keep a list of value driven companies ready as ample opportunity will emerge as the year passes,” he said.

Correction, of course, is an opportunity to buy stocks at attractive valuations. But when to enter the market for buying is a question vexing equity investors now.