The last few weeks has seen the equity markets turn volatile. While the general market direction was downwards, there were intermittent upticks. Caught in between the tussle of macro and micro indicators markets losses deepened.
What is triggering these bouts of volatility?
While domestic indicators such as GDP, corporate earnings are encouraging, the IL&FS Transportation default has spooked investors. Moreover, investors are also worried about the rising oil prices, US protectitism and depreciating currency.
Mahesh Patil, CIO Equity Aditya Birla Sun Life Mutual Fund, attributes the current unease in markets to some of the challenges in the financial sector and the overall tight liquidity situation in the market. “Indian equity markets have been facing tight liquidity conditions in the last few months. The potential default by one of the large NBFCs has impacted financial companies, as people are now wary to lend in this kind of an environment to NBFCs. Investors are keenly waiting to see how it is resolved by measures like capital infusion and deleveraging of assets. The recent measures taken by RBI will help to ease the liquidity situation in the banking system. This cautious market mood is likely to be temporary,” he added.
Shibani Kurian, Senior VP and Head- Equity Research, Kotak Mutual Fund believes that the tussle between macro and micro indicators is leading to the current volatility. While there are definitive signs of improvement in domestic demand indicators, the global and domestic macro uncertainties are on a rise. “Rising crude oil prices coupled with depreciating currency are exacerbating external imbalances in our economy. Elevated oil prices heighten risks to our balance of payments as the current account deficit rises. Net negative foreign portfolio flows further aggravate the issue,” she added.
How long will it last?
Mahesh believes that any big up move in the near term is unlikely given the macro environment. Shibani too agrees with the view and feels that the next 6 to 8 months are likely to be volatile for equity markets. According to Shibani, outcome of meetings of central banks including RBI and the Federal Reserve, the direction of oil prices, any contagion risk arising from other emerging economies, state elections and the Indian general election in 2019 will have bearing on the market. However, she feels that compared to other economies, India stands out in terms of its growth potential.
What should be your client’s strategy?
As the next few months are expected to be volatile Mahesh believes that investors with a short-term view may consider investing in shorter duration or liquid funds on the debt side. Investors with long-term horizon should stay invested in equities as post the correction many stocks are now available at good valuations and offer good opportunity for them to build their portfolio.
Seconding Mahesh’s view Shibani too feels that markets will continue to be volatile in near term. At best, there could be a period of consolidation. However, if macro headwinds continue there are likely to be some downside risks as well. Given this backdrop, she feels it would be prudent for clients to continue to invest systematically with a long-term horizon She feels that this period of volatility makes equity markets unsuitable for investors with very short term horizon.
