The Indian stock market has been quite shaky lately, with the Nifty Fifty dropping over 3,000 points from its highest point. This volatility is expected to stick around for a while. Here are some reasons why:
Trump Policy Uncertainty: There’s uncertainty about trade policies under Donald Trump. People hope he’ll focus on policies that boost growth. Right now, the yield on the US 10-year bond has risen from 3.6% in September 2024 to 4.8%, suggesting high inflation might continue. This makes it less likely for the Federal Reserve to cut rates.
US Dollar Index: The US dollar index has climbed to nearly 110, which is higher than the comfortable level of below 107. A stronger US dollar reduces returns from Indian stocks for foreign investors, leading them to sell off their shares. If they can earn 4.8% returns from US government bonds in dollars, there’s not much reason to invest in Indian stocks, especially with challenges ahead.
Now let’s talk about some of those challenges facing the Indian stock market soon:
Corporate Earnings Concerns: The first two quarters of earnings for the financial year 2024-25 have been disappointing. While there’s hope for moderate recovery in Q3, many are worried it might be just single-digit growth.
Domestic GDP Slowdown: Government spending has supported India’s GDP in recent years, but consumption and private sector spending have been weak. The depreciating rupee also hurts us since we’re a net importer. With government spending low recently, GDP growth might be minimal, raising concerns.
Lastly, there’s some hope due to good monsoon and government support, which could boost rural consumption and shape the economy’s future path.
India Government Budget: All eyes are on the upcoming Indian government budget on February 1st. It’s crucial to see how the government plans to manage fiscal issues like deficit while also boosting economic growth.
The Valuation: The Nifty 50’s market cap to GDP ratio is now at 116.28%, down from 123.3% in December 2023. Back in December 2007, it reached a high of 149.4%. These numbers are much higher than the long-term average of 100.01%. Usually, stock prices adjust to match corporate earnings growth. Right now, the market has risen quickly, making stocks pricey, while earnings struggle to catch up.
There are two possible outcomes: Price correction or time correction. The market has already fallen over 3000 points from its peak. It’s uncertain if it will drop further, but it’s possible. Although corrections can be uncomfortable, they offer a chance to invest when prices are low and can rebound swiftly once earnings improve.
Time correction happens when the market doesn’t drop quickly but stays steady until earnings grow. This takes time and leaves the market uncertain until there’s clarity on earnings and economic growth.
Indian investors should remember that India’s long-term growth story is still strong, even if the market is volatile at times. They should use this volatility as an opportunity to build wealth. It’s not the market that destroys wealth but how investors react to it.
Here’s what investors can do:
1. Focus on quality and growth: During tough times, choose quality stocks and portfolios that focus on growth. The core part of the portfolio must center around Flexi-Cap funds (for aggressive risk profile clients), Balanced Advantage Funds (for moderate risk profile), and Equity Savings Funds (for Conservative Risk Profile Clients).
2. Keep up with SIP and STP: Systematic Investment Plans (SIP) work well during bad market cycles by helping accumulate more units during bad times..
3. Review asset allocation: Many investors have gained well recently, increasing their equity share in portfolios. It’s time to reassess and possibly reduce equity by booking profits.
4. Tax loss harvesting: It means using losses to offset gains. Short-term gains can be set off by short-term losses arising from recent investments to reduce taxes on those gains. In the same way, set off long term capital gains when you book profit by off-setting with long-term losses, like those from a China-focused investment fund.
For more details, speak with your wealth manager.
Article Authored by
Tanwir Alam
Founder & CEO
Fincart Finvest Private Limited
Disclaimer:
This is a generic market view of the author. People must consult their wealth manager before acting on the points mentioned in this equity market outlook. Mutual Fund investing is subject to market risk, please read all scheme related documents carefully before investing.
