In the current year, 2018, the Nifty has hardly performed for the year – up only 3.3% for the year. But the story of the stock markets in the current year lies primarily in the mid and small-cap company stock price performance. The Nifty Midcap index is down 17.2% in the current year and the Nifty Small cap index is down 31.6% for the year. Though over long periods of time, one should expect mid & small cap stocks to do better than the larger cap stocks, this journey comes with a lot more volatility. If history is any guide, one should expect a move back to the expected growth in mid and small-caps at some stage, but the question is – When?
We believe a combination of the following 5 factors are currently driving the markets down and movement around these factors should give you a sense as to when markets should recover.
1. Oil Prices
Crude oil prices (Brent Crude) shot up from $ 66 / barrel at the beginning of the year to a peak of over $ 86 and currently down to under $ 60 (over the past 8 weeks). This sharp move was primarily triggered by the US sanction on Iran oil, which led to a huge supply shortfall – but some of this problem seems to have found a solution, at least for now. High prices impacts India’s trade deficit, government subsidy and inflation. In simple terms, high oil prices are bad for India.
From Rs 63.3/USD in Jan-2018, the Rupee is currently at Rs 69.75 / USD (peaked at 74.5). Apart from the high oil prices, the on-going trade war has led to several emerging market currencies collapsing. Even over the past, though the INR has been depreciating against the USD at about 3.5% annualised over long periods of time, this move has always come in spurts. At some stage, the Rupee should find its levels and stability. There is no compelling reason to believe the historical rate of depreciation should be any different in the future.
3. Foreign capital outflow
Indian stock market has been dependent on FPI (Foreign Portfolio Investors) for several years and with the recent global turmoil, FPIs have sold nearly Rs 27,718.4 cr in Indian equity markets and Rs 56,676.5 cr in the debt markets. This has been part of a global trend, partly linked to increasing interest rates in US. What is surprising is that , for this level of selling, the Indian markets are holding up rather well – thanks to the domestic investors who seem to be choosing Indian equity markets over property, fixed income, or gold.
Valuations in several segments of the markets were expensive towards the end of 2017. Remember that stock prices cannot increase at a pace which is faster than the growth of individual companies or the economy for ever. Valuations of companies have a logical centre of gravity, and whenever it deviates significantly from the mean one can expect a reversion.
Finally, we have central elections coming up in a few months and along with it comes some uncertainty. Equity markets tend to stutter and stammer when such events happen, especially so if the outcome is uncertain.
Despite all these events, there are several positives emerging. Valuations are becoming reasonable, corporate growth rates are starting to pick up and there are definite signs of oil markets cooling off. On the whole, this seems to be a good time to build out your equity investments - what better time than when things are cheap.