Amid the noise around markets entering into overvalued territory and possibility of a correction in the market, the benchmark indices at the National Stock Exchange (NSE) and the BSE saw some volatility this week. Beginning January, the Sensex rose by over 20 per cent to hit a high of 32,074.9 on Monday but on Tuesday, it fell 363 points or 1.1 per cent, the highest in seven months. On Thursday, the index fell by another 50 points to close at 31,904.
While the fall was led by ITC after the GST Council decided to raise cess on cigarettes and there are expectations of some stock-specific corrections, market participants seem to be split on the verdict. While some market participants feel that a correction is due because several stocks have run far ahead of their rational valuations, there are others who feel that even if a correction comes in, it won’t be very sharp and investors should not look to time the market for correction. If there are some who seem to be concerned over the Doklam stand-off between India and China, there are others who are drawing comfort from the fact that there is lot at stake for both the countries on the economic front and both India and China would avoid entering into conflict.
“Currently, the market is not pricing in the tension at the border with China but if the situation escalates, it can become a cause for worry as both the nations are nuclear powers,” said the chief executive officer (CEO) of a leading mutual fund, who did not wish to be named. He, however, said that the correction in the market will be stock-specific and might not be in the broader index. He added that the market continues to enjoy support from Indian retail investors and foreign portfolio investors.
Pankaj Pandey, head of research at ICICIdirect.com, said: “The market is not too much worried about the Doklam stand-off, as both the countries would not like to lose out on the economic front. The stakes are high for both the countries and I have a feeling that the rhetoric would also come down in the near future.”
Leaving aside the Doklam stand-off, experts say that there are some sector- and stock-specific concerns also, as many companies are trading at high valuations. “While such companies look good on performance front, they have run significantly higher and investors are paying for a 5-year performance in 1 year and, hence, they may not see any reasonable gain for some time to come,” said the mutual fund CEO.
But the optimism prevails
Even as there are concerns in the market, many feel that it is not something that investors should worry about too much. “I don’t think that the broader market is overvalued. The corrections, if any, would be stock-specific and it won’t hurt the broader market as the strength in the market continues to be there,” said C J George, managing director, Geojit Financial Services.
There are many positives currently going on for the equity markets, say experts. If, on the one hand, the inflation and interest rates are expected to remain at lower levels, there are expectations that many sectors will move from unorganised to organised category on account of implementation of the goods and services tax (GST).
“Till the time there is prospect of lower inflation and interest rate, the markets will rule high. Lower interest rates make capital cheaper and the relative value of asset goes up,” said Pandey. He added that while the interest rates are expected to remain lower, they might go down further from the current levels and that will favour a growth in equity markets.
There are also hopes on a revival in corporate profit growth in the coming quarters. On Thursday, Reliance Industries (RIL) announced 28 per cent jump in its net profit to Rs 9,108 crore and a 26.7 per cent rise in its revenues to Rs 90,537 crore for the June quarter. While these are above market expectations, experts say that a revival in corporate profitability will provide a boost to markets.
Another factor that is expected to play a constructive role in keeping the markets strong in the medium term is the roll-out of GST, as it is expected to increase tax-compliance across the country as many traders and small companies that were out of the tax net are likely to come in over a period of time. “It is all going to benefit the market in the medium term. While waiting for a correction is futile, in case a correction comes in, investors should look to invest a lump sum amount in the markets,” said Pandey.
Furthermore, a factor that will indirectly benefit the equity markets is the underperformance of other asset classes such as real estate, gold and even debt. Market experts say that they do not see a near-term revival of these asset classes and in such a scenario, equity is the best possible option for investors. The outperformance of equity markets and underperformance of other asset classes have had a significant impact on domestic retail investors choice.
Despite all the noises and concerns in the market, the net inflow into equity schemes of mutual funds over the past three months stood at Rs 26,503 crore. The net investment into equity mutual funds over the past three years, between May 2014 and June 2017, has been a record Rs 2,21,033 crore. This excludes the flow into balanced funds and equity-linked savings schemes of mutual funds.