Market rout: 7 critical questions answered

Stock Market Today

The Nifty has fallen about 1,000 points over the past six trading sessions. What exactly is causing this market rout and how should you react to this volatility?

Why is the market falling?

Markets are worried about rising US bond yields. They fear that the Hamas-Israel conflict may widen into a bigger conflict dragging Iran and other Arab nations into it. This could result in an escalation in crude prices and other supply disruptions, which could potentially keep inflation higher forcing the Fed to hold or even raise rates further.

Also read: Wipro, TechM, Adani Enterprises, HDFC Bank biggest losers as Nifty sinks below 19,000

The US 10-year T-Bill is already at a 16-year high. Now, as the US is dragged into supporting/financing two wars, the fear is that yields could rise further with the government borrowing more to fund war expenditures. Already, the US debt to GDP is at 133 percent. If US bond yields continue to rise, foreign investors will sell their holdings in emerging markets and head back to dollar assets in pursuit of high returns in the US.

This selling could cause stock prices to fall if there isn’t buying to the same degree. Some experts also suggest that some part of the institutional selling is coming in anticipation of electoral loss for BJP in the upcoming state elections.

Also read: How will the surge in US bond yields rub-off on other asset classes?

When will the fall stop?

Can’t say. Things will stabilise only when the markets are convinced about the trajectory of US interest rates going forward. Crude prices are also important to watch out for as it impact our external account, with 90 percent of our crude requirement coming from imports. Both these factors will keep foreign investors wary.

Also read: Market meltdown: 10 largecaps analysts are most bullish on

More importantly, markets are about sentiment, till there is no clarity on the geo-political front, markets will be on tenterhooks. That being the case, technical experts also say that after a 1,000-point correction in six sessions, there is a strong case for a relief rally in stocks, as traders wind down their short positions. This bounce could be short-lived and should not be confused with a trend reversal.

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How much more can it fall?

Can’t say. A 10-15 percent fall in markets, according to experts is healthy. Thus far, our markets have been resilient because domestic investors have kept faith in equities.

Mutual funds continue to see healthy inflows through Systematic Investment Plans (SIPs), which are available to be deployed every month. Post-Covid, domestic institutional investors have been a strong force to counter selling by foreign investors but an important constituency that has supported markets is the retail shareholders who directly buy into equities.

Also read: Markets likely to see a dead cat bounce in next 2-3 days, says Rohit Srivastava

Thus far, retail investors ‘buy on dips” approach has kept the gravy train going with intermittent corrections. There is a high probability that this remains the case in the future too. However, if global markets go into a tailspin, and there is indiscriminate foreign selling, the staying power of the retail audience will be tested.

Should I buy stocks that have fallen?

The decision to buy or sell should be evaluated based on fundamentals if you are a medium to long-term investor and not a trader. Evaluate the growth prospects of the company, its competitive position and buy when the valuation seems reasonable.

Highly valued stocks and high beta stocks (stocks that rise more when the market rises and fall more when the market falls) are avoidable. You want to pick stocks that will fall less when the market falls and those which have growth visibility and are available at a reasonable valuation. Normally, stocks that show strength are better buys than those showing weakness in falling markets.

Should I sell stocks that have fallen?

Stocks where financial performance is deteriorating bear much of the brunt. In bearish times, markets are unforgiving of stocks that disappoint in growth, so prices fall sharply when performance is below analysts’ expectations.

Is the mid-cap/small-cap rally over?

The mid-cap, small-cap rally was largely driven by retail investors. Most of the fund buying also came into these segments because retail investors were pouring money into small-cap-focused funds. Valuation for many companies in this segment has gone up beyond what their underlying growth can justify. It is better to avoid stocks where the current valuation has built in very high future growth.

Should I continue or stop my SIPs? 

SIPs are long-term investment vehicles. Equities as an asset class beat inflation over the long term, so it is a must-have in your portfolio. It is better to stay put in large-cap diversified funds than to put all your eggs in small-caps or thematic funds that may have shown great performance in recent months but may find it hard to compound wealth with no long-term track record to support.