But, do investors need to panic, not necessarily!
The nifty is down close to 10% from its peak. Over the last 1 week there has been evident panic in the markets. The question is whether this is a normal correction or an indicator of something bigger? And what should investors do? Be opportunistic and buy on declines; or panic and rush for the exits?
India story is still intact…
You just can’t miss the irony behind the market correction. The Indian GDP is still likely to grow at 8% plus. Current account deficit and fiscal deficit will be under control. Forex reserves at $340 billion are at an all time high and so is FPI investment. Quarterly results may be below expectations but Indian companies are still growing in a deflationary world. Capital cycle is not reviving, but that was a good 3 years away. Nothing seems to have changed.
Fed rates are hardly an issue…
Indian markets always feared that the Fed would hike rates faster than anticipated. That has been put to rest by Janet Yellen last week. If the US will grow at a slower pace and oil will keep US inflation down, nobody expects rapid rate hikes to happen. So that entire risk of capital outflows is dubious, after all.
Are valuations steep?
We had dealt with this topic in elaborate detail in previous issues. Whether you look at the current market in terms of P/E ratios or dividend yields, valuations are way below the peaks of 2000, 2008 and 2010. The capital cycle may not be reviving but that was always going to be a long and grinding process.
Are there micro level issues?
This is true to some extent. Banks are sitting on a ticking time bomb of NPAs and restructured debt; especially the PSU banks. Most infrastructure companies are horribly leveraged. In fact, the top 100 companies are sitting on $300 billion of debt. As the dollar has strengthened by 26%, the impact on dollar borrowings is yet to be assessed!
So what should be the strategy?
For starters, this is more of a temporary blip. Any bull rally has had intermittent corrections of 10-15%, and that is actually healthy. The challenge for investors is to take a long hard look and restructure their portfolios. Try to go light on the high beta names. Add a generous dose of dollar defensives into your portfolio. Look out for quality stocks that have corrected substantially and present an investment opportunity. Be cautious on mid-cap stocks as they find it hard to gain momentum after a correction. But it is hardly time for the Cassandra to come calling! Most likely, holdings are getting rotated and markets will emerge lighter, cleaner, fitter and healthier in the process. ©