Feb marks third month where Indian equities plunged significantly. Will the trend continue in March?

February marks the third consecutive month in which the market has decreased significantly. There were two major factors contributing to the decline in February.

Reasons for the market decline

1. The Federal Reserve is expected to raise interest rates from 25 basis points to 50 basis points at its upcoming meeting, as the job market maintains resilienceand inflation remains stubborn. There is currently a 25% possibility that the Federal Reserve will raise interest rates by 50 basis points. In February, the Reserve Bank of India (RBI) raised the interest rate and hinted at the possibility of more rate hikes.

This decision was influenced by the expectation that core inflation would be sticky in India, necessitating further rate hikes. The lack of clarity on when the central banks will take a break from increasing interest rates has caused concern in the market, leading to a decline. This is the primary reason why the market has taken a beating.

2. Regarding India, there is news of the possibility of El Nino occurring by July, which is typically one of the peak months for the southwest monsoon season. This has caused concern in the market due to the potential for deficient rainfall, which could further slowdown the already struggling rural economy.

The government has implemented several measures to boost the rural economy, and if the monsoon turns out to be deficient, it may require higher budgetary allocations for the rural economy. Furthermore, a deficient monsoon could lead to increased food inflation, which would not be beneficial for the country.

These are the two primary reasons why the market has experienced a decline.

Historical data and future outlook

Now the question that arises is what should be our approach going forward? Is it likely that the market will continue to decline for the fourth consecutive month? However, historical data suggests otherwise. If we look back 23 years, the market has only fallen for four consecutive months twice. Furthermore, in both instances, the market rebounded strongly in the following month, providing a high positive return.

Additionally, even when the market has declined for three consecutive months, the following month has typically provided positive returns. As a result, there is a high probability that the market will rebound in March and provide positive returns. If for some reason, this does not occur, the probability of a rebound in April increases significantly.

Moreover, not only does the market typically provide positive returns in the month following a three-month decline, but the quantum of these returns is also significantly higher. This means that the risk-reward ratio is skewed in favor of the reward, making it a favorable time to invest.

Performance of India Inc.

Regarding the performance of India Inc, there are varying opinions. However, we believe that overall, the corporate sector has reported a very positive set of numbers, with no companies reporting a negative outlook. Additionally, there have been no significant downgrades to the Nifty 50 earnings since the December numbers, which indicates that the numbers are strong. 

It's important to view these numbers in the context of the current business environment, and when we do so, we can see that India Inc has done an excellent job. However, it is worth noting that interest costs are likely to rise, especially following the recent rate hike. This may lead to some companies, particularly those that are vulnerable to interest costs, underperforming, as their interest coverage ratios may come under pressure. 

Be Greedy When Others Are Fearful

Despite some concerns regarding interest costs, India Inc overall continues to perform exceptionally well. While there has been a decline in trading volume in recent months, we anticipate that volume will rebound strongly due to tax-harvesting, as this is the final month of the financial year. Additionally, improving sentiment is likely to have a positive impact on the market as a whole. 

As Warren Buffet famously said, "Be greedy when others are fearful." We believe that this is the time to be opportunistic and take advantage of the current market conditions. This is an opportune time to invest for the long run, as the risk-reward ratio over the medium to long term is in favor of reward for the Indian equity market.

Author: Sunil Damania, CIO, MarketsMojo