Down but not Out

The domestic equity market fell last week on the back of higher than predicted inflation numbers in the US for May 2022. This spooked the equity market globally and we are no exception. Higher inflation will make the US Federal Reserve more aggressive in hiking rates, which will strengthen the USD index further that is already trading at a 20-year high. Historically, we have seen there is inverse relation between stocks, including the Indian equity market and the USD index. The question that most of you have in mind now is at what level we can see the equity market bottoming out if we see a continuous rise in USD index.

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Irrespective of movement in the USD index, we are already witnessing correction in our market from October 2021. In the last eight months we are down by almost 15 per cent. Since 1979, Sensex data shows that the current fall is one of the slowest falls. It took eight long months for Sensex to fall 15 per cent while in some earlier cases such as the Global Financial Crisis of 2008 and sell-off due to the pandemic lockdown it took less than two months to register such a fall. In every other fall that has lasted for more than eight months, we have seen that in the first eight months the market has fallen by two-thirds of the entire fall. Extrapolating this figure in the current market fall, I can see Nifty bottoming at around 14,500 – which means we may see a further 5-8 per cent decline from the current level.

Nonetheless, this figure is not cast in stone. One factor that strongly differs from the earlier ones is the strong support from DIIs. In earlier instances the DIIs did not have the required muscle power to absorb their selling. This time, however, DIIs have pumped in about Rs 2.5 lakh crore since October 2021 in the domestic equity market against selling of about Rs 3.26 lakh crore by FIIs. This has helped the Indian equity market to outperform most of the emerging markets as well as S & P 500 till now. Another important criterion such as price to earnings ratio used by many analysts also points towards a limited fall from the current level.

Our cover story dives deep to give you a sense if it is right to use the PE ratio to judge the attractiveness of the market and how best to use its data for investment analysis. Indeed, the PE ratio alone will not suffice and lot more needs to be explored before relying on PE values. Further, in our special story we have discussed in detail the prospects of the pharmaceutical sector. The detailed sectoral report will help you get fresh insights into the sector that promises so much in the coming years. Benefit from it as defensives are expected to remain in the limelight throughout this year.

As Nifty is only 5 per cent from a bear market zone, the question remains whether one should increase allocation to equity or should one shift some money from equity to debt in such trying times? While it is possible that the market may slip a little further, we may be close to the bottom. The Indian markets are showing great resilience and going ahead they can be expected to outperform its global peers. We will remain one of the fastest growing economies in the world if not the fastest. As of now, stocks from the renewable energy sector are seen trending along with stocks from the power sector. I can see that several small-caps are clocking more than double-digit returns in a single session. These are early signs of investors making the most of huge price correction in some small-cap counters. There are plenty of lucrative opportunities available for long-term investors and we are committed to introduce them to you in the coming months.

RAJESH V PADODE
Managing Director & Editor

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