Should a volatile Indian stock market worry you?

May 16, 2015

In this issue:
» Is the outlook for rural India weak?
» How does India rank on the human capital index?
» A round up on markets...
» ...and more!

In the last few months, the increasingly volatile nature of the markets has probably left many investors scratching their heads. Have the markets bottomed out, or are there more corrections in store Nobody knows. Everybody has a different opinion to offer.

But what has led to such big swings in the first place? And more, importantly as an investor, should you be worried about these?

The first reason is the rising bond yields in the US. These have been quite low over the last several years on account of the huge quantitative easing programs. And now these are rising on expectations that the US Fed will raise rates soon. Because of higher yields, the preference for other asset classes including equities has been falling.

The second reason is that FIIs are trimming their holdings in India. The view seems to be that India currently is overbought and it makes sense to invest in other emerging markets, which are relatively valued cheaply. This has then led to FIIs pulling out money from the Indian markets in droves.

The third reason is the general uncertainty and volatility seen in the global markets. Concerns continue to remain on the repercussions of Greece exiting the Eurozone and China slowing down among other things.

And the fourth more important reason seems to be that key reforms are not being implemented at the pace envisaged. The delay in clearance of the Land Acquisition Bill is one such example.

Now, how much importance should investors give to all these concerns? Not much according to us. For instance, taking a call on what the US Fed is going to do next is futile at best. The fact that the Fed has not raised rates so far only indicates that it is cautious about the US on its way to sustainable recovery. And Indian markets will be continued to be swayed by FII flows as has been the case in the past.

Greece exiting the Eurozone also cannot be predicted as it is something that has not only economic repercussions but political consequences as well.

The main thing here is how the government goes about introducing and executing reforms that will bolster India's growth. I still think that one year is too early to expect a government to bring about sweeping changes. Part of the reason for the current disappointment is the unrealistic expectations that were built in the first place. For the time being, the current government still has a better chance of delivering than the previous government did. In fact you should probably listen to Vivek Kaul's views on Modi completing one year in office as PM.

Corrections are a part and parcel of a sustained bull run. So as an investor, you should not be overtly worried about the kind of volatility that one is seeing in the stock markets. The idea is to do your research and create a list of good quality stocks that you will love to have in your portfolio. Once the valuations are reasonable, you can immediately start investing in them.

That is certainly the process that I and my ValuePro team are following. We have zeroed in on quite a few strong companies that meet the 'Buffett-would-buy' criteria. And we are keeping our fingers crossed for more such corrections. Indeed, then valuations of many strong companies will start looking attractive and we can go about recommending them to our valuable subscribers.

Are you taking advantage of a volatile Indian stock market to invest in some quality stocks? Let us know your comments or share your views in the Equitymaster Club.

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 Chart of the day
The outlook for India's rural economy continues to become bleaker. This we say because of the dull news that is continuously flowing in. Latest to hit the stand is that of food production expected to come down on account of the adverse weather conditions. As reported by the Mint, last year's drought coupled with the unseasonal weather earlier this year is threatening the food grain output. The ministry of Agriculture is expecting FY15 production to come in at 251.12 m tonnes, a figure lower by over 5% YoY. As today's chart of the day shows, the decline in food grain output in certain years was the result of severe drought conditions. Basing it on this, the agriculture sector's growth for the current year seems to be under pressure. While food security may not be an issue on account of availability of ample stocks, however the stress for the farmers is expected to rise given the falling prices as well.

There are a bunch of high quality businesses that are focused on the rural markets for growth. And this consumption story is what has fetched them premium valuations. However, the short term focus of the market could possibly bring about some correction in their stocks. Long term investors are advised to keep an eye for such opportunities.

Rural India facing rough weather?
*Third advance estimate

World Economic Forum recently came out with an interesting study whereby it ranked countries on how efficiently they develop and deploy their human capital. The study was undertaken to understand whether a country is wasting or leveraging its human potential. What do you think where would have India ranked in this study? Being a country with a relatively young workforce and also skilled to an extent as reflected by high technological exports one would have imagined India to rank high on this list.

However, you would be surprised to know that India ranks abysmally low at 100 on this list! This is lowest amongst BRICS nations. The reason why India's ranking is so low is because of poor literacy rates. Low labor force participation rate due to presence of unorganized sector is another reason why India suffers. Thus, in order to optimize its human capital and leverage it to achieve higher growth in future India needs labor reforms. We also hope that right to education is taken to a new level so as to improve literacy rate. With higher literacy comes better skill sets and increased growth potential. .

Majority of the global markets, barring Europe, ended on a positive note in the week gone by. The US markets were up by 0.4% despite dismal industrial data. The US industrial production witnessed a fall for the fifth month in a row in April on account of a continued decline in oil and gas drilling. This along with weak consumer sentiments pushed down the dollar and the euro appreciated as a result. Consequently, European markets particularly the export-dependent German stocks were beaten down. Even the stock markets in UK and France were down by more than 1% each for the week.

All the Asian equity markets remained firm in the week gone by. The Chinese market was the biggest gainer after China's central bank lowered the benchmark rate by 25 basis points to 5.1% to boost growth. The Indian market logged a gain for the second straight week on the back of recovery in the rupee against the dollar and positive sentiments arising as result of inflation and fiscal deficit being under control. With the country's industrial production growth slowing down to a five-month low, cooling inflation has led to expectations of rate cut by the Reserve Bank of India.

Majority of the sectoral indices have ended the week in the green. Sector wise, auto and banking stocks led the gains while stocks in the metal and realty sectors were the sole losers. The mid cap and small cap indices gained 3.2% and 2% respectively for the week.

Performance during the week ended May 15, 2015
Data source: Yahoo Finance

 Weekend investing mantra
"A business or stock is not an intelligent purchase simply because it is unpopular; a contrarian approach is just as foolish as a follow-the-crowd strategy. What's required is thinking rather than polling. Unfortunately, Bertrand Russell's observation about life in general applies with unusual force in the financial world: "Most men would rather die than think. Many do." - Warren Buffett

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

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