In the past seven trading sessions, Nifty — the most commonly followed broader market equity index — has fallen 673 points or 6.02 per cent from its all-time high of 11,171. More than the fall in Nifty, it is the meltdown in mid and small-cap stocks that is bothering retail investors. Nifty mid-cap index, which had started underperforming two weeks before across-the-board fall started last Friday, has lost 2,438 points or 11.16 per cent from its all-time high of 21,840 which it had touched on January 15, 2018.
Whenever such sharp decline takes place in the equity market, the first tendency is to assign a reason for the fall, which may or may not be correct. The fact is that although investors cannot do anything to alter the reason, they still do it because after assigning a reason, investors tend to feel better and under control of the situation.
The reason for this round of fall is ascribed to a combination of factors such as meltdown in global markets, imposition of long-term capital gains and rising global yields on debt paper issued by central banks, especially that of developed countries.
However, such corrections in the range of 5-15 per cent keep happening in equity markets at regular intervals with or without any rise in yield or global meltdown.
Since 2009, when the first phase of global financial crisis ended and this phase of global equity bull run started, there had been five instances where broader equity market indices like Nifty and the Sensex have witnessed correction, which was more than 12 per cent, which means the Nifty has not even completed half the correction it witnesses every two years. Not to forget the countless corrections of 5-7 per cent that happened between 2010 and 2013 in both the major indices.
Corrections are integral part of any bull run and if they don’t happen, they end up pushing markets into the bubble territory. So, a correction is nothing but detoxification of equity markets.
Should investors panic? Those holding good quality stocks need not panic. History and numbers are on their side. A look at the price performance of stocks like ITC, Hero MotoCorp, HDFC, HDFC Bank, TCS etc clearly show that companies that follow good corporate governance don’t suffer much, as their stocks recover losses in double quick time.
In fact, not only do they cover all the lost ground they also give good return in medium to long term. Today, after nine years and all accompanying noises which keep hitting equity markets locally and globally, a number of good quality stocks are sitting on more than 500 per cent gains.
On the other hand, investors who are holding stock in companies which are not known for delivering results may better sell their shares. When corrections happen, some of the poor-quality stocks will never see the prices they had seen just a month ago.
External factors
The reasons for this round of decline in stock markets are ascribed to meltdown in global markets, imposition of long-term capital gains and rising global yields on debt paper issued by central banks, especially the developed nations