Personal Finance

What lies ahead for the Indian stock market?

Lokeshwarri SK | Updated on March 15, 2020 Published on March 14, 2020

There could be more volatility going ahead. Keep calm and be disciplined

The past couple of weeks would have brought most equity investors to the edge of their seats as the bottom suddenly seemed to have fallen off stock prices.

Friday’s session would have been especially nerve-wracking for most.

Many investors made the most of the crash, and bought shares on Friday. There would have been others who were frozen into inaction by the mind-numbing decline in Indian and global indices in the early part of last week. There could be a few who are sure that this is not the bottom and are waiting for stocks to plumb new lows before entering the market.

Which of these investors are right? The answer — no one really knows. So, instead of trying to be smart and earning some boasting rights for having invested at the exact low, take a disciplined approach to investing, for that is what will help you sail through this patch.

The background

It is well-known that the COVID-19 pandemic, which has affected more than 13.6 lakh people so far and claimed at least 5,077 fatalities in 123 countries, up to March 14, has caused much concern in society at large.

India, with 81 cases and two deaths so far, has not been spared.

While China, where the virus originated, has been reporting fewer number of cases every day, the epicentre of the infection has now shifted to Europe with countries such as Italy (15,113), Germany (3,062) and France (2,860) reporting an exponential increase in the number of cases.

The US, too, is reporting a sharp rise in new cases.

As countries took measures to stop the contagion — by clamping down on travelling, restricting public movement and shutting down public places — the panic has been spreading to the stock markets as well.

Indian markets were further roiled by the crude oil crash due to the price war between Saudi Arabia and Russia, and the Yes Bank crisis.

Governments and central banks have begun concerted action to help their economies. Central banks, including the US Federal Reserve, Bank of England and the People’s Bank of China, have reduced interest rates.

The Fed has opened the liquidity tap by promising almost $1.5 trillion of short-term loans to banks to address the disruptions caused to financial markets. The ECB has promised an additional €120 billion of net asset purchase until the end of the year and more favourable long-term refinancing operations over the next year. Germany has promised €550 billion to companies to help them tide over the pandemic.

Multilateral agencies such as the IMF are also gearing up to help nations hit by the virus.

Are the measures enough?

Global stocks markets rejoiced last Friday, with sharp spikes in India, Europe and US stock prices, buoyed by the measures announced by governments. But has a bottom been formed? That looks unlikely for various reasons.

One, while the contagion appears to be under control in China and a few other countries, others are just beginning to see the outbreak.

According to the Indian Council of Medical Research, India is currently in the second stage where people are infected by those who have a travel history to infected locations. The third stage, when virus spreads unfettered, or stage 4 that calls for complete shut-down, is not yet here. The effectiveness with which the government takes action at this stage to contain the virus will determine the pain to individuals and the economy in India, in the following months. If the contagion spreads in India, stocks will not be spared.

Two, no economy can escape the impact of the virus. With government budgets squeezed by fighting against the virus, growth can take a hit. A drop in economic activity — travel, entertainment, hospitality, sporting activities, etc — can impact GDP as well. According to the IMF, these shocks can be amplified through international trade and financial linkages, dampening global activity and pushing commodity prices down.

The impact of these on corporate bottom-lines will be seen over the coming quarters, depressing earnings.

Three, much of the trading positions of domestic as well as foreign traders are based on leveraged trading.

The margins paid to trade are financed through loans based on collaterals, which could be shares. The market fall since February 20 has already put considerable pressure on such positions. Unless the recovery sustains, there could be further selling due to margin calls.

Four, Indian companies are already on a rather shaky footing. In the December quarter of 2019, the revenues of 4,072 companies that declared results, declined 1.4 per cent compared with the December 2018 quarter, while net profit declined 8.9 per cent.

This was despite the benefit of corporate tax cut. With growing risk aversion and consumption slowdown due to the virus, there could be further hits on revenues in the coming quarters.

While a fall in input prices and lower interest costs could aid bottom-line, it may not materially benefit in a slowing economy.

Approach for investors

There were expectations that the Indian economy could recover in the second part of 2020, helped by lower interest rates, falling inflation, good rabi crop, et al.

But with COVID-19 becoming a full-blown pandemic, and given the existing challenges to corporate earnings, it would be foolish to expect Indian equities to scale new highs any time soon.

That said, there is no doubt that the market decline is a blessing in disguise as undue liquidity had been artificially propping stock prices up over the past five years, despite slowing earnings. The decline is correcting these excesses.

Corrections such as these create opportunities that can put your portfolio on a strong footing for many decades.

It is best to play contrarian when the sentiment is extremely negative to buy stocks or mutual funds. You can start investing your cash surplus, if any, in a staggered manner every time the market behaves in the manner it did on Friday.

No one can predict the exact top or the bottom. Don’t get into the mug’s game of trying to time the market.

Even better, just continue your mutual fund SIPs through the correction. That will help you invest at lower levels, too, helping average your holding to some extent.

Let your fund managers, who have more skills than you, do the hard work in selecting the right stocks in this difficult phase.

If you are comfortable doing direct investing, stick to bluechips and large-cap names while the market slides. This is because, these stocks are the first to wipe out all the losses once the market rebounds. Small- and mid-caps, on the other hand can take many years to move back to where they started from.

Published on March 14, 2020
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