Cover Story

Published: Apr 30, 2022
Updated: Apr 30, 2022

Market Crash, Where Will It Go From Here?

It's the season of battering headwinds as the country's two major stock indices, the Sensex and the Nifty, have plunged thousands of points from their earlier six-month highs.

The 'culprits' for this season of gloom and doom among the investor community are several - fronted by the Russia-Ukraine war which has brought in its wake a surge in crude oil prices and the concomitant inflationary bashing of Indian companies as well as the common man.

Matters have been made worse by the RBI's recent repo rate hike, which has led to bank loans to corporates and consumers getting costlier. Market sentiment has been further hit by the sharp depreciation of the rupee vis-a-vis the dollar. But even as Indian retail investors may have lost their risk appetite, Corporate India provides a look at stocks that have long-term promise

The Indian stock market has charted a distinctly downwards chart under a heavy and sustained selling avalanche touched off by half-a-dozen headwinds. India's benchmark indices have suffered a severe jolt with the Sensex, based on prices of 30 pivotals quoted on the BSE, tumbling from 62245.43 on October 19, 2021 to 54470.67 as on May 9, 2022, and the Nifty, based on 50 leading stocks quoted on the NSE, nosediving from 18604.45 on October 19, 2021 to 16301.85 on May 9, 2022. In the process, investors in equity have seen their wealth getting wiped off to the extent of around Rs 4,00,000 crore!

The downward drift in the market is all-pervasive, with almost all industry segments facing widespread selling pressure and all categories; viz., pivotals, mid cap and small cap stocks, losing sizeable ground. The S&P BSE large/midcap index has declined from 7541.81 (October 18, 2021) to 6616.13 now, the S&P BSE Metal index from 23742.99 (April 11, 2022) to 19130.27, the S&P BSE Auto index from 27271.03 (November 17, 2021) to 23884.33, the S&P BSE Capital Goods index from 31,149.89 (January 17, 2022) to 25942.70, the S&P BSE IT index from 38713.30 (January 17, 2022) to 30696.81, the S&P BSE FMCG index from 15425.89 (October 18, 2021) to 13536.91 and the S&P BSE industrial index from 6214.59 (January 18, 2022) to 5278.24. Even the prices of pivotals have declined sharply. The price of Larsen and Toubro has dropped by over 30 per cent from its recent high, Mind Tree by 28.88 per cent, Dixon Technologies by 25.42 per cent, India Energy by 27.30 per cent and India Mart by 48.71 per cent.

There are several factors which have battered market sentiment and have led to a widespread and sustained fall in stock prices. First and foremost is the Ukraine-Russia war which has adversely affected stock markets all over the world. Subsequent US and European sanctions against Russia have worsened the market sentiment as the surge in crude oil prices has administered a body blow to several economies, including India. The spurt in crude oil prices has fanned an inflationary price spiral which has aided the downward drift in stock prices. The unprecedented spurt in commodity prices has pushed up the cost of production of several industries, resulting in a marked drop in margins of various companies. The war has also adversely affected the performance of companies exporting their products to both Ukraine and Russia

As if this was not enough, the Reserve Bank of India, the monetary authority of the country, recently raised the repo rate sharply. The RBI's surprise move has led to a drastic change in monetary policy by giving up the cheap money policy and bringing in the tight money policy, thus raising the cost of credit to companies and individual bor- rowers of home loans, car loans, etc. This has given a further fillip to the inflationary price spiral, adversely affecting market sentiment further.RUPEE SLUMP The third development that has hit market sentiment very hard is the May 15, 2022 Corporate India 27 steep depreciation of the Indian currency. The value of the rupee against the US dollar slumped to a lifetime low of Rs 77.52 a dollar recently. Of course, almost all currencies of emerging countries, including the Chinese yuan and the Japanese yen, have weakened against the dollar but India is more vulnerable than other nations as it relies on imports for about 85 per cent of its oil requirements, a situation worsened by the soaring crude oil prices.

During the last few days, US bond yields have touched the highs of 2018 and the dollar index has reached a 20-year high following robust US job data for April 2022, fuelling expectations of further rate hikes by the Federal Reserve. Many experts now expect the rupee to trade in the range of Rs 78-79 to a dollar in the coming months. While some analysts believe that the RBI may intervene to arrest volatility, others believe that it might not do it as frequently as before. It is feared that the bias will now stay negative and the rupee will see further deprecation towards Rs77-80 to a dollar levels.

The sharp fall in value of the rupee against the dollar adversely affected stock market sentiment, and on the day of the announcement the Nifty and the Sensex closed with a fall of 0.67%. The pressure on the broader markets was also intense. The S&P BSE Midcap index and S&P Large-Small index were down 1.89% and 1.67%, while the S&P BSE Large-Cap index was down 0.88%. The broader markets are expected to remain under pressure. Overall, the risk-off sentiment in the equity market is being led by rising crude oil prices, sustained selling by foreign portfolio investors, a hike in interest rates in major economies, and the nowrecord low of the rupee. Says an expert at Ambit Capital, "We expect this trend to continue, with large caps expected to outperform mid caps and small caps." Adds another expert, "The tough stance by the US Fed and the rate hike by the RBI, the Bank of England and the Australian central bank have reduced the risk appetite of investors."

CPI SOARS

The market has been further hit by the raging inflationary price spiral. During April 2022, the price index reflecting retail inflation soared to an 8-year high of 7.79 per cent against 6.95 per cent in March 2022 and 4.21 per cent in April 2021.

Given the runaway rise in inflation and widespread fears of it going broad-based going ahead, the RBI has taken a major turn in its policy stance and adopted a dear money policy in place of an easy money policy by sharply hiking the repo rate. The RBI has preferred a slowdown on the growth path as costlier credit would dampen the excitement of entrepreneurs to go for expansion and development. This phenomenon, in turn, adversely affected the stock market sentiment as market behaviour is directly related to corporate development.

The raging inflation and the sharp fall in the rupee's value against the US dollar have pushed up the cost of raw materials, which in turn will eat into the margins of the companies, adversely affected their profitability. This in turn will depress market sentiment further.

Another factor that has proved detriment for the bull phase in the stock market is the heavy and widespread selling by FII and FPIs. Foreign outflows have hit market sentiment very badly and a weak rupee has led to a faster outflow of funds from the market

FPI EXODUS

Maintains a market expert, "The weakening rupee and rich valuations do not bode well as far as foreign flows are concerned. Data shows that foreign portfolio investors have already pulled out Rs 1,50,000 crore in 2022 so far. A weak rupee eats into FPI equity returns and very rich valuations are not helping either. Even after the correction, Nifty is trading at around 19 times FY2023 earnings. This is higher than the long-term average of 16 times and certainly not a buyable valuation, particularly when equity markets globally are facing many headwinds like a growth slowdown, the Ukraine-Russia war and supply chain disruptions caused by stringent lockdowns in China.

Market sentiment has also been adversely influenced by global headlines which are focusing more on high inflation, as well as the recent US Fed rate increase. The Fed has raised interest rates by half a percentage point, an expected move according to FED Chairman Jerome Powell.

IT'S GLOBAL: CHOKSEY

Deven Choksey, financial wizard, renowned market expert and managing director of KR Choksey Investment Managers, opines that on account of the geo-political disturbances, the worldwide trend is to disinvest in equity, crypto currencies and commodities. In line with this global trend, DIIs and HNIs are also reported to have emerged sellers.

Mr Choksey adds that market sentiment is certainly nervous and a further fall in prices cannot be ruled out. However, this is not a sartorial bearish trend. There is no need to panic and genuine long-term investors should see a good opportunity in this downward drift to pick up fundamentally strong and growth-oriented stocks in order to rebalance their portfolio

According to Sandeep Tandon, CIO, Quant Mutual Fund, in the last two quarters, when one sits down and analyses the FII holding data, one will see that their ownership has declined in growth stocks and increased in value stocks. "That is trend we are seeing globally. I will not look in isolation that FPIs are just sellers. It is a selling of the growth stocks, not the value stocks. One has to balance one's portfolio and optimize this opportunity," he says.

Mr Tandon is confident that "we are at the cusp of an inflation point -- sometimes it gets extended by a few days or weeks here and there."

SELECTIVE HEADWINDS

Some experts believe that a sharp uptrend may not be around the corner. Frontline stocks sold by FPIs - which were stable and strong hands -- have been shifted partly to DIIs and largely to individuals, which are weak hands. So, for sometime frontline stocks will continue to face headwinds in terms of the supply coming from individual investors. As a result, going forward the market will have to spend some time moving sideways. Hence there could be volatility for some more time. Besides, there are still a lot of uncertainties in the market, as well as in the economy and on the political scene. That is what will hurt market sentiment in the coming days.

However, going ahead, market sentiment is bound to get better and accumulations will start. Many fundamentally strong growth as well as value stocks have met with a sizeable beating and hence are ripe for picking up. We have given a list of such shares which discerning investors can pick up at attractive prices in the coming days.

Watch list of best buys

Day by day, the market is going down on continued selling pressure. Shares of all hues and colours have lost substantial ground. Even fundamentally strong and growth-oriented stocks are no exception. However, this does not mean the end of the road for retail investors. Intelligent investors should slowly start accumulating valuable stocks which can yield excellent returns once the current bearish phase is over. The Ukraine-Russia war, the rupee’s depreciation and rising inflation, which have sent the markets into a tailspin, also have some bullish elements which will give a big boost to certain categories of shares. For example, the IT segment, speciality chemicals and textiles will be in fine form very soon. Here is a list of such stocks which are capable of yielding excellent returns going ahead.

Caution: Invest slowly and gradually in instalments. Don’t invest in large amounts at any single time.

Dark clouds over LIC IPO

The stock market crash has spread dark clouds on the valuation of the LIC IPO, the largest public offerings in the history of the Indian, capital market. Thanks to the sustained fall in stock markets the government was forced to cut the size of the IPO. Now that the IPO has been oversubscribed around three times and it is going to be listed in a few days, distributing news is coming from the grey market. When the IPO was announced, the issue was quoted at a premium of Rs. 105 in the grey market. With sustained downtrend in the market started declining and reached Rs. 60 on May 20, Rs. 50 on May 12 and alas! It has gone into negative zone on May 12 with a negative premium of Rs. 20., which increased to Rs. 30 on May 13 the day LIC issue opened.

Experts suggest that discernible investors should not keep large holding in LIC stocks as the returns on the issue will not be that remunerative going ahead! In line with this 872 against the issue price of Rs. 949, suggesting a discount of 8 per cent.