Long-term financial goals—not current events or market corrections—should guide your investment journey

When we track our investment portfolio and events around us that influence market movement, we are enamoured by current developments.

The recent market correction, before the Maharashtra election result-led rebound, had its genesis in multiple factors, foreign portfolio investors (FPIs) selling approximately $14 billion—the highest ever in a short span of time of less than two months—being one of them.

Then, there was the US election result that fuelled market reaction to potential measures by the president-elect and the impact on India. Corporate earnings are growing, but the growth rate has been a little muted of late, which too contributed to the market correction. Likewise, a strengthening US (measured by the DXY or US dollar index level) and the rupee's weakness also played a role, as did a spate of primary issuances, i.e., fresh supply hitting the market.

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Events, outcomes and markets

The extent of the fall has been varied, from double digits at the index level to much higher for certain stocks. In behavioural finance, there is the concept of recency bias, which means people attach higher weightage to recent events. With this background, let us look at certain facts.

Valuations were stretched. All the popular parameters for valuation like the price to earnings multiple, price to book multiple and market capitalisation to GDP were stretched, as per historical levels. When valuations are stretched, chances of a correction are high, even with a small trigger. In the current phase, it was triggered by the FPI pullout.

In that sense, amidst rich valuations, a correction is healthy. Returns achieved at peak market levels were borrowed from future earnings per share (EPS) growth, in a sense, as valuations ran ahead.

Also, bear in mind that India is the fastest-growing major economy in the world. Not only is its broad GDP growth rate the highest in the world, but its per capita GDP growth rate is also the highest.

The demographic dividend is much touted but true—India has the highest working-age population in the world.

The country's corporate EPS growth rate is among the fastest in the world.

There is also increasing formalisation of the economy, implying higher coverage in the formal economy. Markets work in the formal space.

Consumer spending is another bright spot. India has the highest population with increasing income and disposable money. This contributes to the corporate sector.

While the pullout by foreign investors may have been a trigger for the fall, FPI ownership is approximately 17 percent of the total market capitalisation. It implies that approximately 83 percent of ownership of the market is domestic—in other words, the Indian market is not dependent on foreigners’ actions.

This is also borne out by the fact that more and more new domestic investors are coming into the fold. There are 17 crore demat accounts and 5 crore mutual fund unit-holders.

These facts and trends remain intact. In the short run, we watch events unfolding, we watch market reactions and try to build a one-to-one correlation. However, it is futile to build this one-to-one correspondence as the market is a confluence of multiple dynamic factors with varying degrees of influence. Let us look at two illustrations.

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US Treasury yield movement

On September 18, 2024, the US Federal Reserve reduced its overnight rate by 50 basis points. Prior to that, the market consensus expectation was a reduction of 25 basis points. Normally, one would expect bond yields to fall, pursuant to a higher-than-expected rate cut action. Subsequently, on November 7, the Fed cut again, by 25 basis points. Surprisingly, US bond yields went up. Ten-year maturity US Treasury yield, which was at 3.68 percent on September 18, moved up to 4.43 percent on November 20. This is an upward movement of 75 basis points, subsequent to the 75 basis points rate cut! It is not completely random, there are reasons.

Prior to September 18, bond yields eased on expectations of a positive outcome. Post the event, it was about discounting or baking in further rate-cut measures. Data releases on the US economy were buoyant. The implication is, if the economy is doing relatively better than thought of earlier, then future rate cut expectations would be dimmed. The next president may follow policies that would increase the fiscal deficit of the US. In that case, issuances of US Treasury papers would be more than what was factored in earlier. It would be pro-inflationary as well, which is unfavourable for the bond market.

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Crude oil dynamics

Another variable—the price of crude oil—is tracked by all markets. Usually, during times of geopolitical tensions, particularly ones that can disrupt the supply chain, oil prices are expected to move up. Earlier, if one were told that Israel and Iran would directly confront each other, the prediction would have been that crude oil prices would flare up. Over the last two months, Brent crude oil price has averaged less than $75 per barrel. Again, there are reasons. Oil inventory levels in the US, the biggest producer in the world, have been better than thought earlier. There is talk of production hikes by the Organisation of Petroleum Exporting Countries. There are expectations that Israel would not directly attack Iranian oil facilities. This is another illustration of conventional cause-and-effect not working out in the near term.

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Conclusion

When we track our investment portfolio and events around us that influence market movement, we are influenced by current developments. We try to draw a cause-and-effect relationship between events and markets and our investments. However, quite often, it is a futile exercise to either make sense of what is happening or gauging the impact. As long as the journey is unbroken, focus on the long term.

The writer is a corporate trainer (financial markets) and author.    

Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.