It is hard to put your finger on any one factor that resulted in the sharp crack in the Nifty. The Sensex lost nearly 2000 point in a single week and shows no signs of stopping. It all began with the IL&FS fiasco and then hit the NBFCs and the HFCs. The oil subsidy really destroyed value in the OMCs and the upstream companies were also not spared. In between, there is the problem of rising yields, a falling rupee and a trade deficit and current account deficit threatening to go out of control.
Yes, there are macro worries
It would be naïve to believe that the macros are in fine fettle. There is a major concern on the rupee front. At 74/$, the rupee is not helping anything, not even exports. Widening trade deficit and CAD at 3% of GDP is a basket case for a run on the rupee as well as for a possible downgrade of the sovereign ratings. These are hardly things that India can afford at this point of time. Then there is the bond yields conundrum and the tightening liquidity in the money markets. Key defaults by NBFCs or HFCs could have a contagion effect on the debt markets with its implications for equities too. The GDP growth is strong but it is still vulnerable to domestic liquidity and also to a global trade war. Inflation is under check but crude oil can change the equilibrium quite rapidly. It is this combination of macros that is actually playing against equity markets in the short term.
No Cassandra; please!
While there are certainly worries on the macro front, it is too early for the Cassandra to come calling. GDP growth is likely to get back to peak levels with the currency liquidity back to its pre demonetization days. The last couple of quarters have shown a distinct growth in top line for Indian companies and also improvement in margins. The domestic consumption sector is already hinting at the first signs of a wealth effect trickling down to towns and villages. That is going to be a huge demand pull for these sectors. Globally and in India, we are seeing the revival of the capital cycle and that is good news for the capital goods players. Once the bank clean up is completed, we could actually see the real boost to output and profits. Valuations have come down to around 20-21 times historical earnings and that provides relative margin of safety for investors.
Not the time to be bearish
Normally, bull markets take shape when the last bull has been squeezed out of the market. Today, we are finally seeing extreme skepticism and that is one of the pillars of a bull market. Valuations are a lot more reasonable and profits and sales are likely to grow steadily from here. This is hardly the time to get wary of the markets. If you are brave and believe in the India story, it is time to get your shopping baskets out! ©