Benchmark indices, the Sensex and the Nifty, are down by less than 10 percent from their peak levels. Yet, it feels that the correction is pretty deep and painful.
The gloom and doom can be easily explained by the carnage in broader markets. From the peak level, the CNX Midcap and Smallcap indices have corrected by over 25 percent and 35 percent, respectively. But many erstwhile popular companies have lost more than 50-60 percent of their value during the same period.
Even within the benchmark indices, there are a number of companies that have declined by 30-40 percent in the past 6-12 months. Some of the losing stocks pertain to popular sectors like auto, media and banks. Adding to the gloom is the continuous slew of negative news flow related to stress faced by certain business groups or alleged irregularities by some well-known promoters.
Above all, the bigger issue has more to do with expectations. A lot of hope was pinned on election outcome and the expectation of a new rally, post the majority mandate once again to the ruling party. The election results did fuel a short rally. However, the government’s policy decisions are turning out to be more socialist in nature rather than anticipation of a push to growth to kick-start the slowing economy. To top it all, the proposal to increase tax burden on foreign portfolio investors has turned out to be the last straw that broke the camel’s back.
Unfortunately, high expectations from the new government and the propping up of the benchmark indices by a handful of stocks had led to complacency among investors. Even when midcaps and core sector companies were correcting continuously over the past one year or so, investors kept holding on, deceived by the buoyancy of the Nifty and the Sensex.
Thus, it is not surprising that the mood is pretty subdued despite many positive factors. Rain God is smiling again, crude is going towards the $50 mark and the RBI is cutting interest rates. Even globally, the US Federal Reserve is back to cutting interest rates, which is supposedly positive for the emerging markets. A few months ago, such positive macros would have attracted loads of foreign and domestic inflows into the equity market.
But it never fails to surprise. Some positive news flow can quickly change the mood. I would avoid speculating on it here. After all, there are limited investment options available today, given the high real interest rate in the economy. And debt market is in doldrums.
However, the lessons need to be learnt. Quality matters and every correction is a reminder. After all, not losing big time in corrective phases is secret to making money in the equity market.Gaurav Dua is head of research, Sharekhan. Views are personal.