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Should the 600-point fall in the Sensex worry you?

Mar 10, 2015

In this issue:
» Has the NREGA contributed to rise in rural wages?
» India's billionaires invest in property
» No let up in promoter pledging
» ...and more!

00:00

The Sensex losing around 600 points yesterday is a stark reminder of how global cues have a significant impact on the Indian stock market. But that is not all. Factors back home could also be attributed to this. Let's look at the global scenario first.

One of the reasons why the Sensex notched losses yesterday was expectations that the US Fed will start raising interest rates soon especially give the recent strong US jobs data. Should this happen, US will begin to look attractive in terms of returns to foreign investors. Indeed, as we have highlighted in our previous editions of the 5 Minute WrapUp, when there is volatility in the financial markets, foreign investors prefer to park their money back home. So, foreign investors will start pulling money out of the emerging markets including India. Expectations of the US Fed raising rates have been doing the rounds for quite some time now. But there has been no action on this front. Indeed, growth in the US so far has been tepid and largely aided by stimulus measures. So it will be interesting to see whether the US Fed would want to jeopardize this by raising rates. If it does do so, and growth once again stalls, we will not be surprised if the Fed reverts to loose monetary policies once again.

Dollar strength is another reason that spooked the markets. Interestingly, while the US Fed is expected to raise rates, the European Central Bank (ECB) and the central bank in Japan are expected to do just the opposite. In short, given that the latter regions are still experiencing anemic growth, more stimulus measures are likely to be announced. And so the US dollar has been gaining ground against the Euro and the Yen. Dollar strength has consequently put pressure on the Indian rupee as well. The silver lining in the cloud is that while the rupee has lost against the dollar, it has strengthened against the Euro and the Yen. So the overall impact on the current account balance may not be as severe.

These are the global factors. But the fall in the Sensex can also be attributed to frothy valuations and hence some correction taking place. Indeed, we pointed out in yesterday's edition that while price of stocks have been running up, the same has not been reflected in earnings growth of India Inc. Not that we doubt the India growth story. But reforms implementation by the government is bound to take a longer time and a sharp growth in earnings of Indian companies is not something that will happen overnight. Thus, most stocks if not all, are trading at expensive valuations and a further rise does not look sustainable unless earnings also catch up.

Will we see a further correction in the Indian stock markets? We do not know. What we do know is that investors need not worry too much about drops of this kind. We continue to have faith in the Indian growth story and the unfolding of Megatrends in the longer term. That is why correction in the Indian stock market on account of global cues, like we experienced yesterday, is something that we welcome. Because it will make our task of recommending good quality stocks at reasonable valuations that much easier.

Do you think the Indian stock market will see more correction in the coming months? Let us know your comments or share your views in the Equitymaster Club.

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02:28
When it comes to reforms and what the government has in store, one of the surprise announcements the Finance Minister made in his recent Budget speech was the increase in allocation towards the National Rural Employment Guarantee Act (NREGA). This scheme was introduced by the erstwhile UPA government with the aim of alleviating poverty. But whether it succeeded in contributing to the growth of rural wages and the overall economy was always doubtful.

And this was made clear in an article published in Mint. According to this, there has not been much of a link between the NREGA spending growth and the rise in rural wages. For instance, between the years, FY08 and FY10, there was a rise in rural wage growth even when the expenditure on NREGA declined. Between FY11 and FY14, there has been some amount of volatility with respect to the spending on the scheme. But in this period, the rural wage growth has consistently declined.

Infact, the trend in rural wage growth has aligned more with agricultural output and construction activity. Hence, NREGA alone will not do the trick of bolstering the fortunes of rural India.

03:18
  Chart of the day
We have highlighted time and again, equities are the best bet for long term wealth creation. Retail investors will do well to hold a good part of their investable surplus in a portfolio of high quality stocks. Many of India's wealthiest individuals owe their fortune to the markets. However, what is interesting is how these ultra high net worth individuals (UHNWIs) go about investing their wealth. A recent report by Knight Frank has predicted that India's population of 'super-rich' (minimum net worth of US$ 1 bn) is all set to double over the next 10 years. By 2024, India will be in fourth place globally in terms of number of billionaires.

Why are we highlighting this? It's to draw your attention to the fact that real estate is the preferred investment asset class for India's billionaires. As the chart shows, luxury property prices in Mumbai are comparable to cities of the developed world. This has had an adverse effect on the overall property market as affordable homes have become a distant dream. With this trend spreading to other cities in India, we wonder if the common man will ever be able to afford a decent sized home in a good location.

Is India's realty market overheated?

04:12
As we stated above, investors should take a long term approach to investing and not worry about short term corrections in the markets. Ideally neither should company promoters. However, there will be one set of promoters who may be worried. We are referring to promoters who have pledged most of their shares. We typically tend to avoid stocks were the promoters have pledged a large part of their stake.

This is because barring exceptions, promoter pledging is usually a sign of financial stress. When the stock falls below a pre-decided price, financial firms holding the pledged shares can dump them on the market driving down the stock.

Recently, the promoters of a pharma company and a Mumbai based real estate firm revoked their entire pledged stake. However, this seems to be exceptions. As per an article in the Business Standard, promoter pledging shows no sign of abating. As of 31st December 2014, the value of pledged shares of BSE 500 firms, was a huge 1,640 bn! There were 14 firms where the promoters had pledged over 90% of their holdings. We would strongly advise investors to give due consideration to this important aspect before making an investment in stocks.

04:45
The Indian stock markets had a rather volatile trading session today as they oscillated to either side of yesterday's close. At the time of writing, the BSE-Sensex was trading lower by around 181 points. Losses were largely seen in oil & gas and banking stocks. As far as global markets are concerned, while Asian indices were trading in the red at the time of writing, the European indices were also trading weak.

04:56
 Today's investing mantra
"The bottom line is to have a responsible plan for your investments and know what you own and why you own it. There's too much at stake not to." - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Radhika Pandit.

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Equitymaster requests your view! Post a comment on "Should the 600-point fall in the Sensex worry you?". Click here!

3 Responses to "Should the 600-point fall in the Sensex worry you?"

V.JEGANATHAN

Mar 11, 2015

The Indian stock market and world markets has already taken into account the rate increase that is going to take place in US, which reflected in the correction in the overall stock and metal markets, gold down, BSE and NSE are corrected by 6%. The rate hike by US is imminent and some analysts are expecting the same sooner than later, viz. before the FOMC meeting. Though analysis reveals that rate increase by US will affect the world economy but US wanted to be in helm of affairs always. Euro was competing hetherto, is now losing against the US $, Japan already implemented the QE to stem their economy, ECB started QE by 70 Billion Euro bond buying programme, every month. Even then the rate hike by US is going to take place.
Modi wave so far driven the market and the equities skyrocketed. Now, in my point of view, the correction in our stock market by another 5% is imminent. The rate hike by US is playing the major role that will affect the world markets.

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krishna Murthy

Mar 10, 2015

Yes, The account projected by the PSB and PSU's are manipulated one. we do not trust them, this is so after Syndicate bank chairmen, bhushan steel, SBI, Canara bank etc. Be cautious and go back to your old age idea of collecting gold even it depreciates do not bother. One worth in hand is more than the two on a tree.

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B G DOST

Mar 10, 2015

NOT AT ALL, THOUGH EXPECT ANOTHER 1000 POINT FALL WITHIN MONDAY 16/3/2015 AND PREPARE THEN TO START BUYING AT DOWN MARKET.

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Equitymaster requests your view! Post a comment on "Should the 600-point fall in the Sensex worry you?". Click here!
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