The massive sell-off in Chinese equities sent the Indian stock market into a tailspin on Monday. The Nifty fell 490 points or 6 per cent, affecting performance.

Markets globally have been jittery for a while now, since China let the yuan depreciate stoking concerns about the pace of its economic growth.

Taking cue from the 15 per cent fall in the Shanghai Composite Index in the last one month, all markets, including the Indian stock market, have corrected a good 6-15 per cent. CNX Nifty has fallen 12 per cent in the past month, along with the rest of the emerging countries, such as South Korea (Kospi) — 12.9 per cent, Brazil (Bovespa) —13.3 per cent and Russia (Micex) — 15 per cent. CNX Nifty has fallen 10.8 per cent till date in 2015.

While the Indian stock market has faced the angst of a global sell-off much like the other emerging markets, and is likely to encounter bouts of volatility in the coming weeks, there are some bright spots to note too.

Growth earnings For one, Indian markets are still attractively priced if one considers past valuations and expected growth in earnings. Trading at 16.7 times one year forward earnings (subsequent four quarters), Nifty is still attractive when compared to its five-year historical average of about 16 times; and far lower than the lofty 22-24 levels of 2008. While it may seem expensive when compared to other markets such as KOSPI —10.2 times or Shanghai —12.8 times, it is still reasonably priced.

This is because one needs to evaluate the PE ratio in relation to the denominator- earnings. After remaining depressed since 2007-08, Nifty companies’ earnings are likely to pick up pace over the next year or so. At the peak of a strong earnings cycle, valuations of 15-16 times may appear pricey. But at the start of a healthy earnings cycle, slightly higher valuations are justified given the re-rating that can happen.

Bonds resilient Despite the mayhem in the stock market, bond markets held their ground. The yield on the 10-year government bond inched up marginally by about 10 basis points to 7.89 per cent on Monday. The yield on the 10-year government bond has been firming up since March, when the RBI made its second rate cut.

According to market players, the rout in equity markets in unlikely to spill over to bond markets, unless the RBI indicates risks to inflation expectations or hints at policy actions to control the falling rupee just as it did in 2013.

According to Suyash Choudhary, Head fixed income at IDFC mutual fund, bond markets are still holding out, because the underlying risks to inflation are well contained. “Accelerated fall in commodity prices, on top of better food management and lower minimum support price setting by the government,  will only anchor inflation expectations better, which should prove to be positive for bonds eventually,” he adds.

The underlying support from investors will also keep bond markets less vulnerable to a steep fall according to Suyash. “Demand from insurance companies and provident funds for instance will continue to remain healthy given the fall in FD rates. Demand from banks, that have seen deposits grow faster than credit, will also provide support to bond markets,” he said.

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