Indian equity indices have witnessed their steepest fall in 11 years on Thursday. After the correction, Sensex has plunged over 22% from its record high in January 2020.
At the core of this downward spiral is the fear that the worsening coronavirus outbreak across the world will push the global economy into recession. With countries announcing lockdowns and factories shutting their operations, investors fear that credit quality of companies could deteriorate and lead to large-scale defaults in the system.
Further, a sharp fall in crude oil prices, concerns over slowdown in Indian economy and financial market uncertainty around the Yes Bank episode have worsened investor sentiment.
While it is impossible to predict market’s near-term direction, we tried to understand how fund managers read this correction and what are the factors that give them hope about a bounce back.
Prashant Jain, CIO at HDFC MF told a business news channel that the market has experienced similar dips in 2000 and 2001. He feels that market usually returns to sanity after such a big fall. The veteran fund manager added that the recent plunge in crude oil prices would give much-needed fiscal space to the government and that would be positive in the near term.
S Krishnakumar, CIO – Equity, Sundaram MF is also of the view that lower energy prices and lower interest rates are positives for India. Further, the government and RBI appear to be more in sync than before to ensure a smooth growth path and this adds an additional layer of sustainability to the recovery ahead.
When asked about the near-term outlook for equity markets, some fund managers said that a further 5-7% correction would make valuations across the market cap extremely attractive and that could prevent a steep fall.
Vinit Sambre, Head-Equities, DSP MF says, “From historical valuation perspective, Indian equities will hit the lower end of valuation zone after 5-7% correction from current levels. Therefore, fundamentally attractive valuations should hold further decline.”
A CIO of one of the top 15 fund houses also said that a 5% correction from current levels couldn’t be ruled out. However, after that, aggressive sell-off from overseas investors is likely to resume and attractive valuations would steady the market.
What to recommend?
From a valuation perspective, mid cap and small cap schemes were said to be relatively attractive than large cap stocks at the start of 2020. However, given the sharp corrections fund managers feel that there are attractive valuations in the large cap space as well.
