Did the Indian stock market celebrate prematurely?

Taste this. A Reuters poll of 30 stock strategists in mid-May predicted that the BSE Sensex will make up for less than half of its losses, closing 2022 at around 56,000. This is what happened. From the low of 51,360 in June, the market was up 16%, crossing the 60,000 mark on Wednesday, before the correction on Friday.

The bottom line: Expect the unexpected on Dalal Street in 2022. Volatility will be endemic as the market tries to make sense of a globally uncertain macroeconomic environment. It may be a rollercoaster for investors.

Why have Indian stock markets risen?

It was a pulsating July for the Indian stock market, with the Sensex and Nifty up 9%. In August, the market is up 2.6% so far. This bounce is the result of a complex interplay of factors.

Optimism that most of the bad news was already factored in and that the worst is over fueled the rally. Despite the blip on Friday, the Indian market closed with a profit for the fifth week.

With the US slipping into a technical recession, many traders believe the US Federal Reserve will now take it easy on rate hikes. The Fed has raised rates by 75 basis points twice — in June and July — to bring inflation under control, which is at a 40-year high.

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In India, the Ministry of Finance claimed in its monthly review on Friday that the country is better placed on the growth-inflation-external equilibrium triangle for 2022-23 than it was a few months ago. Many experts agree.

And then came the return of the foreign investors. After nine months of selling Indian stocks, FPIs became net buyers again. In July, they bought nearly $600 million worth of Indian stocks without selling amid a weakening dollar index and healthy corporate earnings.

Foreign investors appeared to be betting on India’s growth story, with the country expected to grow by about 7% in fiscal year 2023, potentially making it the fastest-growing major economy in the world again. Many FPIs appeared to be bargain hunting, picking up blue chips at attractive valuations. However, foreign investors sold off on Thursday, even as the dollar index rose.

All of these factors seem to affect Indian stock prices.

Is the worst over for Indian stock markets?

At the moment, the outlook for Indian equities looks more favourable. Retail inflation eased in July, with both food and non-food inflation declining worldwide, including crude oil. And as central banks tighten further to curb inflation, the market hopes the interest rate cycle is about to peak, especially in India, if not in the advanced economies.

The Indian government also seems optimistic about the inflation outlook in India. In its July Monthly Economic Report, the Treasury Department says: “In the absence of further shocks to global commodity prices, particularly crude oil, inflation in India would likely have peaked for this cycle by now, thanks to monetary tightening in the RBI and its policies.”

But challenges remain and the market will experience some anxious moments in the coming months. If central banks in advanced economies, especially the Fed, continue to hike interest rates to bring inflation into their comfort zone, it will shake up the Indian stock market as well. There will be FPI outflows, as has been seen in recent months, and there will be concerns that a sharp slowdown in the developed world will also weigh on the Indian economy – a weakening rupee will fuel inflation and exports will take a major hit .

The Indian government admits that global financial markets “may have started prematurely celebrating the easing of short-term inflationary pressures in the developed world.” and the cloud over the Chinese economy.

India is negatively correlated with other emerging markets

Still, both global and local investors are more optimistic about India’s growth story than other emerging markets. India was the best performing market in the MSCI Asia ex Japan index in July and also outperformed most other emerging markets around the world. China, in particular, remains a concern for global investors, with its economy growing at its slowest pace since early 2020, growing 0.4% in the second quarter. Also, the problems in the Chinese real estate market seem to have only worsened, even as new covid lockdown measures were imposed in several cities.

Interestingly, as Mint reported a few days ago, the MSCI India index has now been negatively correlated with the broader MSCI Emerging Markets (EM) index for 20 months, the longest period since its inception in 1993.

Between January 1, 2021 and August 12, 2022, the MSCI India rose 18.5%, while the MSCI EM fell 21%. In 2021, the MSCI India index rose by 26.66%, while the MSCI EM fell by 2.22%. This year, until August 12, the MSCI India is down only 5.07% so far, while the MSCI EM is down 7.5%.

China, South Korea and Taiwan make up almost half of MSCI EM.

What are the options for private investors?

The Sensex is now trading at 23 times lagging EPS and 21 times forward EPS (FY23) – at these levels the market has historically been fairly valued, analysts say. According to some analysts, a market correction will be an opportunity to build quality stocks. The market also appears overbought on technical charts. Relative Strength Index (RSI) momentum indicator, which indicates that a stock is overbought or oversold, appears to be a warning sign. The Nifty RSI, at over 80, is well above the overbought zone of 70. The RBI measures the speed and price change of stocks and the broader market.

Remember that short-term trading is high risk at this point given the expected short-term volatility in stocks, experts say. Watch the market in the medium to long term and if you must trade, hold tight stop losses.

In fact, many more Indians now seem to view stocks as family silver and regularly invest in the market with a long-term view through systematic investment plans or SIPs. There are now over 50 million mutual fund SIP accounts in India. Assets under management of SIP schemes are growing by approximately 30% each year. Keep in mind that stocks outperform all asset classes over the long term, especially in emerging economies. The Sensex has jumped about 20 times in the past 20 years – from 3,000 to about 60,000 now.

Ace investor Rakesh Jhunjhunwala himself – though also an adept trader – always kept his eye on the long term and had predicted that Nifty would hit 100,000 by 2030.

Elsewhere in Mint

In Opinion Manu Joseph argues why: science is disappointing compared to his own reputation. Ashish Dhawan explains why Indian philanthropy exists now ready for take off. Anirudh Suri writes what America is Inflation Reduction Act means for India. In long story, a economist girlfriend explains why stock prices have risen again.

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