The sharp fall in sentiments on Indian equities, bonds and the currency will have unnerved many investors. The Sensex and Nifty have fallen by over 4% from highs seen in March 2013 while the yield on the 8.15% 2022 government bond has gone up by 10bps from lows. The Rupee is down over a percent since end of February 2013.
The reasons for the turn in sentiments (sentiments were upbeat until a month back with equities and bond prices trading at one year highs) are a damp squib 2013-14 budget, RBI showing worries on inflation, political issues with a key ally pulling out of the coalition government, 2G scam issues with telecom CEOs being called for questioning and worries on corporate performance for the fourth quarter of 2012-13. These events all unfolded in a span of around twenty days since the budget day of 28th February 2013. Topping domestic events was the issue of taxing bank deposits in Cyprus that helped pull down the Euro on fresh concerns of sovereign debt in the Eurozone.
How should you look at these events mentioned above? Will these events pull down markets further? Should you come out of equities and long term bond funds? Should you change your portfolios to reflect further market weakness? All these questions will be running through you mind now and we will address these questions through our analysis.
The events mentioned above are definitely negative for the markets and volatility is bound to be high in the coming weeks. Markets can go down further from current levels of 18,900 on the Sensex and 5700 on the Nifty while bond yields will rise going into April as markets brace for a fresh government borrowing program to commence. The Rupee will also feel the heat of weak equity market sentiments.
Should you come of equities and long term bond funds? On the equity side, outlook for the broad market in general is not highly pessimistic. The reason is that global equities are doing well with indices in Japan, US and Germany at multi year highs. US economy is on a growth path and central bank liquidity is keeping investors invested in risk assets. However despite a better outlook for the broad market, there are stocks that are highly vulnerable in the current market scenario. Stocks of leverage companies, stocks of companies with poor corporate governance and stocks in sectors that are affected by the economic downturn will see more price falls. You are best invested in a portfolio of companies with strong balance sheets and those that will benefit from the macro economic changes taking place in India and the world.
Interest rate outlook is also more positive than negative though RBI has cautioned markets against rate cut expectations. The reasons for interest rate outlook staying positive are a) Weak demand to pull down non food manufacturing inflation to levels below the multi year low levels of 3.8% seen in February 2013 b) Soft commodity prices globally to bring down inflation expectations and c) Government borrowing to go smoothly in fiscal 2013-14.
The outlook for the Rupee is not overly pessimistic as it already reflects negatives of a high CAD (Current Account Deficit) and a weak economy. The Rupee is trading just 5% off all time lows and given that portfolio flows have been positive despite market volatility and a trade deficit that came in 13% lower in February 2013 on a year on year basis, the Rupee is likely to see stability at current levels.
To sum it up the market volatility will continue but you should ride the volatility and not run away from it.