It was black Monday (24th August 2015) for investors in the stock market as evidenced by the -1,621 point drop in the BSE Sensex a -5.9% decline. The Nifty 50 index did not fare any better which lost 490 point, a decline of -5.9%. This is its biggest fall since the 2008 global economic meltdown. Indian equities market, by the way, is not the only one in a bear grip. From the Nikkei in Tokyo to the FTSE 100 in London, all major international indices were in the red last Monday and the US markets followed suit. Indian rupee has also lost its value vis a vis the dollar, hovering near to the 67 mark.
Media pundits and investors are attributing much of the short-term debacle to a triple Chinese whammy factors namely; collapse of the Chinese Stock market, depreciation of Yuan and declining macroeconomic fundamentals. As the second largest economy on the planet, developments in China should not be ignored. More blood is expected on the streets in the coming days and weeks. Hence, fasten your seat belts, hug your knees until the typhoon blows over.
In contrast to other emerging markets, India’s prospects appear to be stronger than most emerging markets. However, this cheerful outlook for the economy will not insulate domestic equities from a further selloff by foreign investors if the turmoil in China continues, or as the rupee weakens further. Since last Monday, foreign portfolio investors have sold Indian shares massively, their highest selling in a five-day stretch since the third week of January 2008; start of the global financial meltdown.
Why this selling spree if India is faring better than other emerging market economies? As per an article from the Economic Times, the biggest reason is that the recent selling has come from emerging market funds, which have been the biggest investors in India in the last few years. Brokers, who service these investors, said these funds are encountering big redemptions. Investors in these funds are seeing the value of their holdings erode due to the fall in emerging market currencies. In such situations, investors just sell. It made sense for emerging market funds to sell more of their Indian holdings because they were much more overweight on India than most other markets, thanks to the country’s relative strength. The 4% decline in the rupee against the dollar triggered by the devaluation of yuan has changed it all.
Amid the mayhem in the past few days by a slowing China and devaluation of the Yuan, India’s growth prospects are much brighter than other emerging markets. This optimism is supported by the International Monetary Fund (IMF) growth projection. India is considered to be in a bright spot with growth expected to surpass the 7% mark. Improving industrial output together with early signs of increase in capital expenditure are testimony of improving growth prospects. Inflation, both retail and wholesale, are under control. Some few years back, high inflation was a major roadblock to spur investors’ confidence.
Given the fresh blood oozing in stock markets around the world, is it the right time for investors to attempt to catch a falling knife? Catching knives for a living can be a dangerous profession, and many investors, professionals and amateurs alike have lost financial fingers and blood by attempting to prematurely purchase plummeting securities. Rather than trying to time the market, which is nearly impossible to do consistently, it’s more important to have a disciplined, unemotional investing framework in place. At VIKASA, our investment philosophy is always geared to discipline and being true to our mandate.
India faces a sustained risk-on. Conditions that led to the market spike in 2014 still hold true. We think the Indian markets have a 15-20% upside from here, on continued favourable domestic macro inches. In the current scenario, we would continue to stick to our approach of investing in quality stocks with strong fundamentals and financials.