“Manic Monday! Sensex falls 1,624 points - biggest fall ever in the history of the markets! Markets lose seven lakh crores in just one trading session!” These are some of the headlines you might have come across on August 24, 2015, or a day after that.

The slide in the markets leading to this day, and subsequently, may have disconcerted some investors. The question on their minds is, “Is this a correction or a trend reversal?”

Major correction This correction of over 16 per cent since January 2015 is the first major correction in 23 months — driven predominantly by global factors. The markets expected that the devaluation of currency by China would lead to a currency war and lead to a contagion of collapsing currencies and asset prices across all emerging markets.

The markets also expected China to slow down significantly. Most of the commodities have touched multi-year lows during this risk-off trade.      

A volatile currency would hurt China’s exporters. Also, market share increase due to depreciation will be minimal as China is dominant in the markets it is present in. Hence, it would prefer a stable currency or a gradual depreciation. China has been slowing from a double-digit growth to 7 per cent growth.

It would not be a surprise if it slows down further as it carries out structural reforms to encourage domestic consumption and decrease dependence on trade and investment.

This is neither the first nor the last time that markets correct on global concerns. The scenario in 2006 was somewhat similar to what is happening now.

Volatile market In May 2006, the Fed had increased the Fed funds rate for the sixteenth time in a row. This led to the speculation that US economic growth would slow down and would hurt the emerging markets. The Indian market corrected 29 per cent in about a month. One year later, the return from the market was 67 per cent.

The Fed has decided to postpone the much-awaited rate hike due to global concerns. It is, however, committed to the loosest tightening in its history — meaning a gradual increase with a relatively low terminal point. One thing is clear — growth will be protected at any cost and at least one engine of global growth is on full throttle. The meeting expected growth rates in Europe and China to be positive surprises for the markets.  

Positive outlook We believe that the outlook for India equities is positive from a medium to long-term perspective. The fall in oil and other commodities has helped India reduce its trade deficit. Current account deficit and fiscal deficit are at manageable levels. CPI at 3.66 per cent and WPI in negative territory provide room for further interest rate cuts from the RBI. Corporate earnings have hit a trough and will recover from the second half of the financial year. Government capital expenditure is picking up. Competitive federalism is at play with State Governments wooing domestic and global investors and companies alike, to set up plants in their states.

With valuations below the long-term average, any correction would be a buying opportunity. Data shows that in the past, periods of corrections have led to gains in the following one-year period (see table).

As Warren Buffett once said, “Look at market fluctuations as your friend rather than your enemy; profit from the folly rather than participate in it.” By whatever name it is referred to — corrections, crashes, draw-downs or pull-backs — it is the nature of the financial markets. The markets keep evaluating future expectations with changed fundamentals, thus giving opportunity for some to enter and some to exit.

 For investors, it is important to get a grip on rational decision making, keep fear at bay and implement basic tenets of investing. Execute your investment policy statement by rebalancing your allocations. Keep the SIPs going. Do not leverage while investing. Invest some part of your “cash-on-sidelines” at every dip.

(The writer is Co-Chief Investment Officer, Birla Sun Life Asset Management Company)

Related Topics
comment COMMENT NOW