Welcome to the Year of Volatility

As we move ahead into 2024, the spectre of ‘leap year volatility’ looms over the financial landscape. History bears testimony to this trend. Each leap year in the past two decades has brought forth a unique set of challenges for investors. From the dotcom bubble burst to the global pandemic, leap years have seen significant market fluctuations. In 2000, the dotcom bubble burst led to a 14.65 per cent correction in the Nifty. The 2008 sub-prime crisis witnessed a staggering 51.79 per cent fall, while the 2004 unexpected union election results led to a 17.47 per cent tumble. 

Contrarily, amidst the 2012 Euro crisis, the Nifty ended with a 27.7 per cent return. The year 2016 saw rising non-performing assets (NPAs) among financial companies and a mere 3 per cent return was generated by the Nifty 50. Most recently, the global pandemic in 2020 triggered a 38 per cent fall and an 86 per cent rise, concluding the year with a 15 per cent return. While not definitive, these historical patterns underline the need for cautious optimism in the face of potential market turbulence. The prevailing sentiment echoes a circumspect approach. Valuations loom significantly above historical averages, triggering concerns among investors. 

Warren Buffett’s market capitalisation-to-GDP ratio, a revered metric, currently stands at a daunting 124 per cent, compared to a long-term average of 80 per cent. Furthermore, India’s premium valuation against its emerging market counterparts is glaring, boasting a 70 per cent premium compared to the MSCI EM index, in contrast to the long-term average of 40 per cent. One-year forward PE ratios across indices have breached historical norms, signifying potential volatility, especially in the Mid-Cap and Small-Cap segments. 

While Large-Cap indices are only 6 per cent higher, mid-cap indices are elevated by 18 per cent, and the Nifty Small-Cap index boasts a 35 per cent surge. Given these elevated valuations, astute portfolio management recommends a pivot from small-caps, especially those that have outpaced their fundamentals, towards large-cap stocks. However, amidst these prudent cautionary approaches, it remains crucial to retain a broader perspective. For long-term investors, India’s economic fundamentals remain robust, with the long-term growth narrative unscathed. Additionally, historical trends suggest that during declining US yields, Asian markets tend to underperform.

Delving deeper into this subject, our cover story scrutinises the implications of an interest rate reversal on the equity market. Our meticulous examination, spanning the start of the millennium, delineates the impact of the initial interest rate cut on various market segments. Insights gleaned from the analysis shed light on the anticipated reactions across different market capitalisations and sectoral indices. Further, recent occurrences have seen numerous corporations receiving tax notices. In one of our articles, we dissect how such notices impact a company’s share prices, offering guidance to investors holding shares in these entities. 

Furthermore, this edition features a special segment highlighting the best business schools in India for the year 2024, segmented by regions. This comprehensive list aims to aid aspiring management graduates in choosing the most suitable option. In closing, dear reader, let us toast the market’s recent highs while keeping a vigilant eye. This period calls for measured actions, judicious profit booking when necessary, and discerning stock selections based on genuine value, steering away from fleeting thrills. Remember, even the most robust market bull cannot defy gravity indefinitely. Happy investing!

RAJESH V PADODE
Managing Director & Editor