Sensex and Nifty closed at 24616.97 and 7489. 10 respectively for the week ended February 5, down 1% for the week. Gains on the last two days of the week enabled the indices to recover the losses of the first three days. Good results from Eicher Motors, Lupin, Cadila Health, Dishman Pharma, Vijaya Bank and Whirlpool on Friday helped boost the sentiments.
Markets worldwide have been excessively volatile since the beginning of 2016. Fear has gripped both developed and emerging markets alike. This January witnessed the worst start for a year for the global markets since 2008. While the MSCI EM Index is down by 9.06% in January, India is down by 4.7% only. Even though the sentiments have been negative, the fact is that India is, relatively speaking, out-performing other emerging markets.
Presently, there are three major concerns for the global economy: 1. There are fears that the Chinese slowdown will lead to a global recession. 2. The commodity crash, particularly the crude crash, has impacted the commodity exporters and global trade. 3. The FED’s normalisation of interest rates, many fear, has the potential to trigger capital outflows from emerging markets. These fears are pulling the market down.
But there is another view that is optimistic, indicating hope: China is rebalancing its economy from an investment led model to a sustainable domestic consumption led model. As part of its transition to a market economy China is making its currency more flexible. Yuan is not likely to be sharply devalued triggering a currency war. Therefore, the Chinese slowdown will not lead to another global recession. The crude crash is overdone. 2016 is likely to witness the beginning of many shale bankruptcies in the US reducing the supply and firming up the price of crude. In the context of global concerns, the FED’s rate rise will be lower than expected earlier.
The pulls and pushes of these opposing views are causing excessive volatility in markets now. The poor performance of the emerging markets is due to the sustained FII selling, particularly redemptions by Sovereign Wealth Funds, raising money to finance budget deficits of oil exporters.
The fear factor may remain for some more time. So long as the FIIs continue to press selling, the rallies in the market will be sold into. But soon, the FIIs will distinguish between India and other EMs and will resume investing in India. Medium to long-term growth and earnings prospects are the best for India among emerging markets. Among the emerging markets India is in a macro sweet spot and is presently the fastest growing large economy in the world. This fact will be appreciated once the global turbulence subsides; then portfolio inflows will happen and the bull market will resume. Big one time investment is not advisable at the present stage in this volatile market.
The best strategy for investors would be to invest systematically: SIPs in quality stocks, equity diversified funds or balanced funds would be ideal in this time of turbulence.