THE market is likely to witness heightened volatility in the short to medium term amidst global uncertainty and pending domestic issues. The postponement of the Federal Reserve decision to hike rates has not done anything good to the world markets, including India. Moreover, the forecasts of most analysts about government policy and corporate earnings have been way off the mark. For instance, implementation of GST is likely to miss the April 2016 deadline. Corporate earnings for the April-June quarter remained subdued, and are likely to remain so for another couple of quarters, with the capex cycle not likely to pick up anytime soon. FIIs have so far withdrawn more than US$3 billion in August and September with India witnessing the third highest outflows in Asia after Japan and South Korea. This points to the fact that the Indian market remains susceptible to big outflows in the event of any global turmoil.
Though a sharp decline in global commodity prices has come as a blessing for India, any sharp decline in the rupee along with a weak monsoon, the expected pay and pension revision following the 7th Pay Commission’s recommendations and the sharp decline in savings rate are all bound to cast their shadow on the RBI’s decision to go for aggressive rate cuts. However, FDI flows to India have witnessed a robust increase indicating that long-term flows to India are convinced about the improving macroeconomic fundamentals of the economy. But the sentiment at present is such that an otherwise minor negative development such as Volkswagen admitting to manipulating emission norms in the US can cause a massive sell-off.
The important question in the minds of both investors and analysts remains: how far can the market fall from here? If history is any guide, given the prevailing global risks and the current valuations of 15 times plus of the Sensex, the scope for further decline may be more than what everyone is prepared for. The Sensex valuations are expensive as they are factoring in high double-digit earnings growth next year. If the current trend of earnings downgrades continues and so does the kind of redemption pressure Global Emerging Market Funds are witnessing, the Indian market may witness yet another bout of selling that may not be matched equally by domestic buying. In my view, the long-term outlook for the Indian equity market is still positive. Inflation is coming down, the RBI is cutting interest rates and economic growth is still strong. In fact, the recent market rout has removed some of the valuation excesses that occurred during the Modi rally. Given the severity of the crisis in China and the nascent recovery in the US economy, the Fed will not repeat previous policy mistakes. In short, it’s not the time to panic for Indian equity investors. It’s actually time to do some bargain hunting with the caveat that investors take a long-term perspective.
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