Markets crack—what should you do?
Monday morning blues took on a different meaning as domestic equity markets crashed in line with global markets’ performance on Friday. S&P 500, Dow Jones, FTSE and Nikkei fell 2.8-3.2% on Friday. Shanghai Composite index fell about 4.5%. While it fell another 8% on Monday, Dow Jones opened nearly 1,000 points lower.
The fall in global equities is linked to global market uncertainty, which was triggered with China devaluing the yuan earlier this month. Coinciding with this was the fall in crude prices; Brent crude has fallen 11% since 11 August. The tremors of what these developments mean for economies and capital markets across the world are yet to settle. India is a part of a larger emerging markets basket and foreign investors, especially institutional investors, in times of uncertainty tend to shift away from more volatile emerging markets. As a result, the Indian currency and equity markets are in turmoil.
The rupee, which has been correcting, closed at 66.64 against a dollar on Monday, down 1.2%. The benchmark S&P BSE Sensex and CNX Nifty closed around 5.9% lower.
“The current correction is due to external factors, primarily devaluation of the Chinese currency. India being a developing economy, can’t remain completely insulated,” said Vighnesh Shahane, chief executive officer and wholetime director, IDBI Federal Life Insurance Co. Ltd. “Valuations are certainly improving and the fundamentals in India look good. It’s important to look at equities from a long-term perspective. If you are buying market-linked products such as unit-linked insurance plan, don’t get distracted by short-term blips,” added Shahane.
Why does China matter?
China’s lower-than-expected economic growth is causing a flutter in global markets. As the Chinese economy slows down and its consumption takes a hit, there is uncertainty on how this will affect other economies.
According to a recent report from Edelweiss Research, contrary to popular perception, the Chinese yuan’s depreciation is likely to have been triggered by an attempt to stem capital outflows, tighten liquidity and offset any attempt to reflate the economy. The devaluation is, undoubtedly, deflationary and a potent headwind for countries caught on the wrong side of terms of trade (ratio of export prices to import prices).
At the same time, growth in developed markets remains under pressure; interest rate hike in the US has been pushed forward yet again as the economy isn’t on a smooth growth path. Sharp fall in crude price has spooked oil-producing nations. Amid this, risk-off or moving out of high-risk assets such as equity and emerging market currency is the natural response of global money managers.
Saurabh Mukherjea, chief executive officer, institutional equities, Ambit Capital Pvt. Ltd, said, “The global reaction to the hard landing in China is having a knock-on effect on our capital markets. Certain sectors such as metals, mining and exports could see a second level of adverse impact as the scale of global slowdown becomes more visible. Then the banking sector could be affected.”
India can’t escape the impact of the development; the foremost change can be seen in the rupee’s depreciation. Monday’s 1,625-point crash in equity market indices (Sensex) is a spillover of the negative global sentiment.
In the past and also given the present state of the Indian economy, it has shown resilience against global factors, thanks to greater dependence on domestic growth. “India is in a reasonable comfort zone (relative to other emerging economies) on most macro parameters such as inflation, (foreign exchange) reserves; even in case of the fiscal deficit, we are moving in the right direction,” said Vetri Subramaniam, chief investment officer, Religare Invesco Asset Management Co. Pvt. Ltd.
Most of this could be a positive for India; fall in commodity and crude prices will eventually help us. So, the question is: will this correction sustain?
Ambareesh Baliga, market analyst, said, “We need to assess the extent to which global factors can impact our economy. So far, we have shown resilience and the Reserve Bank of India (RBI), too, has always acted when required. Our economy is on the path of recovery albeit slower than earlier expected.”
Stay close to allocation
While the economy might be on a path to recovery, markets are a different story because you need to consider the price at which you are buying and for what level of growth. Hence, don’t rush in. Evaluate the valuations relative to growth and then start thinking about buying, said Subramaniam.
While sudden and sharp falls do provide an opportunity to buy, don’t get into a buying frenzy. In the long run, asset allocation is important. So, you shouldn’t start redeeming your fixed income allocation earmarked for use in the next year and use it to buy equity today. Inch up your allocation if you missed buying before the rally or are under-allocated.
Ashish Shanker, head investment advisory, Motilal Oswal Private Wealth Management, said, “We work on portfolio asset allocations and wherever clients are under-allocated to equity, we are recommending buying. Moreover, past market cycles have shown that when money has been invested in sudden large falls, future returns have always been good.”
Others echo similar explanations. “Market valuations are mean reverting; whenever markets are overpriced, corrections occur, and vice versa. Given this correction, we are moving closer to reasonable valuations,” said Subramaniam. “Over the medium term, this will play out. Ultimately, you can attach reasons to market behaviour, but historically, valuations revert to mean and that’s what is happening now,” he added.
Lower valuations are a good point to start buying, but you don’t know what tomorrow holds. So, stagger the investment. It’s difficult to spot the bottom of the market or when the fall will stop and markets will turn around. Hence, one should continue existing investments and top up systematic investment plans (SIPs) if you can.
Gajendra Kothari, managing director and chief executive officer, Etica Wealth Management Pvt. Ltd, said, “Over the past 2-3 months, we have told investors to enter the market through SIPs. We are also enhancing the allocation to equity through STPs (systematic transfer plans).”
But it’s advisable to not get too ambitious in what you buy. The only way to deal with such a situation is to have a portfolio of high quality shares backed by strong managements and good cash flows, said Mukherjea.
However, which segments should one choose? S. Naren, chief investment officer-equity, ICICI Prudential Asset Management Co. Ltd, said, “Mid- and small-cap stocks have high valuations; remain with large-caps, which are, at present, fairly valued. Investors should be in hybrid funds and stay with asset allocation.”
Mint Money take
While the opportunity is there, no need to jump in and buy for the sake of it. Invest in equity only if you have spare cash; stagger the buying. Don’t upset long-term asset allocation. Experts agree large caps are better valued than mid and small caps at present. For long-term investors, 3-5-year outlook remains positive. So, continue existing investments with that perspective. Many overseas brokerages remain overweight on India and identify it as the most promising emerging market. So, remain invested; don’t rush into buying and surely don’t sell in a panic.
Deepti Bhaskaran contributed to the story.