Over the last week, the markets saw some sharp declines. While Nifty 50 ended the week 3% lower, and Nifty Midcap 150 4% lower, several stocks saw >10% single-day-falls.
Lately, the markets have been impacted by several factors including:
Renewed geopolitical stress caused by developments in the Middle East around Israel and Palestine
A sharp rise in oil and commodity prices, resulting in fears of a potential reversal in the control achieved on inflation
Fears of a restart on a consensus regressive monetary policy across the globe, resulting in high rates lasting for longer than earlier anticipated
Bond yields in the US hitting the 5% mark, which has caused a sell-off across most other asset classes, especially in emerging markets
The usual uncertainty before any election in India, amongst foreign investors, which results in steps to reduce risk, cap exposure or take more calculated decisions around allocation to India
All these factors, have been contributing to the negative skew that markets have been witnessing lately, which is also exacerbated by the sky-high valuations, which India is currently trading.
While at 17x one-year forward PE, the Nifty 50 appears to be in line with historical averages, the relative premium that India commands compared to the world and emerging markets has been at its highest
The rally in mid and small caps over the last 6 months has stretched valuations, with them trading at 27x and 24x respectively
A combination of sour macros and high valuations is a natural cause of heightened worry and anxiety, especially when the falls are drastic.
However, the correctness of key decisions around buying and selling lie in evaluating and keeping sight on the direction of the markets.
Over the medium-long term, India is set to continue exhibiting:
High earnings growth led by favourable demographics, long term policy initiatives, aggressive government spending, a revival of private capex, and public-tech and infrastructure-led productivity gains
High valuations led by consistent outperformance to the rest of the world
The combination of high earnings growth and valuations is likely to result in India’s outperformance to the world over the next 5-10 years, which will naturally reflect on portfolios as well.
With that direction kept in sight, the easy way to navigate transitory bumps can result from simple actions like risk reduction (pivot to large caps, high allocation to sectors/companies with high visibility, orientation towards value instead of growth, etc.), and of course, buying on dips.