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Explained: Should you worry about falling markets, or is it an opportunity to invest?

There have been concerns on both the domestic and global fronts. Besides the spike in Covid numbers in India and announcement of lockdowns in several districts, there have been concerns over the rise in bond yields in the US and the domestic market.

Written by Sandeep Singh , George Mathew | Mumbai, New Delhi |
Updated: March 26, 2021 10:25:44 pm
Sensex, Sensex Bombay Stock Exchange, Bombay Stock Exchange, India Sensex, bse sensex coronavirus, covid 19 foreign portfolio investors, indian stock market today, Indian expressInvestors should follow a staggered approach of investing. They could go for either mutual fund investment through the SIP mode, or direct stock-picking in a staggered manner.

A sharp rise in Covid numbers over the last two weeks — new cases crossed a record daily high of 53,400 in the government’s latest update — has unnerved the markets, which have already been marked by concerns over high valuations and rise in bond yields. The benchmark Sensex fell 740 points or 1.5% to close at a nearly two-month low of 48,440. Since the recent rally that started alongside the Budget announcements on February 1, it is the first time the Sensex closed below that day’s closing (48,600) and it has lost 3,713 points or over 7% since the all-time high closing of 52,154 on February 15. But despite all this, market participants remain optimistic and say those who missed out on entering the market should take this as an opportunity.

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What are the concerns?

There have been concerns on both the domestic and global fronts. Besides the spike in Covid numbers in India and announcement of lockdowns in several districts, there have been concerns over the rise in bond yields in the US and the domestic market. There is a feeling in the market that if bond yields in the US rise further, it may impact the fund flow into emerging markets.

The US Fed has indicated that there may not be policy rate hikes through 2023 and it will continue to support the economy and maintain liquidity; yet the foreign fund flow into Indian equities has slowed in March. Until March 25, foreign portfolio investors had invested a net of Rs 10,100 crore into Indian equities, the lowest monthly net inflow since September 2020, when they pulled out a net of Rs 7,783 crore.

The weakness in the market is more related to Covid. “Elevated levels of bond yields in the US have also resulted in some weakness and technology stocks are witnessing some correction. It has also had an impact on crude prices which have softened a bit,” said Pankaj Pandey, head of research at ICICIdirect.com.

Sensex since Budget day

How has rising yield affected markets?

Bond yields have been rising across the world. The sudden rise moderated the enthusiasm of equity market participants throughout the world. An example that showed the relation between bond yields and stock markets is the taper tantrum of 2013, when a sudden rise in bond yields caused markets to slide as mass bond selling was witnessed. Bond yields are inversely proportional to equity returns; when bond yields decline, equity markets tend to outperform, and vice versa. This could be one of the reasons for the Nifty’s correction this week, said an analyst.

While a rise in bond yield raises the cost of capital for companies, which in turn compresses the valuations of their stocks, they also play a big role in FPI flow.

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Will the fall continue?

A lot will depend upon the Covid trajectory. If cases continue to rise, various local administrations may take steps that may impact economic activity to an extent, which in turn may impact the markets. If the numbers start to fall and vaccination gathers more pace, the markets may regain their enthusiasm.

Market participants, however, feel that a 7-10% fall in the markets after a 40-50% gain is not something to be worried about; it should be seen as a part of market movement. “I don’t see a big correction in the market and the market continues to be in the medium- to long-term bull run. Corrections are part of market movement and one should not be worried too much,” said the Private Banking head of a leading bank.

What should investors do?

A number of existing investors have a feeling that they should have sold a portion of their holding when the Sensex hit the peak in February. While that may hold true to an extent for some investors in their late 50s or nearing retirement, it should not be a big reason to be worried about. “I think it is an opportunity to invest. Investors who missed getting in the market earlier can get in now,” said Pandey.

There are others who agree to this and say that while there are some valuation concerns, investors should look to enter into large companies. “There are enough opportunities to buy good stocks and own for the longer term. I would say to invest in large companies as they will continue to grow in market share. Yes, they may be expensive, but good things don’t come cheap, because such companies are constantly learning and growing in value,” said Rakesh K Singh, group head —investment banking, private banking, capital markets and financial institutions at HDFC Bank.

Investors should, however, follow a staggered approach of investing. They could go for either mutual fund investment through the SIP mode, or direct stock-picking in a staggered manner.

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