The current state of India’s financial markets is sending confusing signals to all. Interest rates, bond yields and equity prices usually have some co-relation to each other. Currently, all of them are moving in one direction. That is, down.
Usually, when bond yields go up, interest rates rise and equity prices fall. When bond yields go down, interest rates fall and equity prices go up.
However, the 10-year government securities yield touched a 30-month low last week. The Sensex and Nifty are at their lowest level in one month. The Reserve Bank recently lowered interest rates and has done three rate cuts so far this year. Inflation is relatively benign.
Besides this, global equity markets are seeing a boom. Corporate earnings in America are scaling new peaks. That has pushed share prices in the US to record levels. The US economy continues to expand uninterrupted. It has boosted the global equity market sentiment.
If you look at other markets, India’s equity markets are underperformers by a margin. Brazil and Russian shares are also up by at least 15 per cent. Share prices have moved up by an average of 10 per cent across emerging markets.
Indian equity markets are languishing. Since January 2019, the Sensex and Nifty are up only 4-5 per cent.
An average Joe, who may have read through these data points, may only get confused. Knowledge is the best tool for investor protection.
What you should do
If you have just started to invest, you need to continue investing through an index fund. You may be tempted to opt for more complex mutual funds due to the active promotion by such firms. However, if you are not interested in keeping track of your investments regularly, invest in a Nifty or Sensex fund.
If you are an investor with experience, you are probably used to the market gyrations. Yet, understanding the current market scenario may be challenging. If you follow companies in the Sensex and the Nifty, they are reporting profit growth that is either falling short of expectations or just about meeting them. A lot of companies outside the benchmark indices have reported stronger profit growth.
Considering the flat-to-negative trend in Indian frontline and mid-cap shares, most equity mutual funds have reported a poor return. In contrast, two listed mutual fund companies like HDFC AMC and Reliance Nippon Asset Management have seen a sharp surge in their share prices. HDFC AMC has reported 42 per cent growth in net profit and has continued to rally in the stock market despite trading a significantly high valuation. InterGlobe Aviation, the owner of India’s biggest airline IndiGo, has reported a dramatic surge in profits that was at least twice than market expectations.
As an investor, you may want to ensure that all your eggs are not in one basket. You may want to own shares of mutual fund companies besides owning index or equity funds managed by them.
What lies ahead for markets
If you go through the analyses of the press or the analyst community, the common factor is disappointment. There is an apparent crisis of confidence in the domestic markets. The Budget tax proposals show that it is not confident about any improvement in the GST or direct tax collection. All these mean that it will be hard for the government to meet Budget estimates and a tacit admission that India is amidst an economic slowdown. In such a situation, governments indulge in boosting consumption. However, the rich are paying more tax, and the poor are paying more taxes indirectly via a hike in fuel taxes. These measures would reduce the level of consumption. It will then affect the demand for goods and services and lead to lower productivity. That could hurt the future profit growth of businesses.