What is happening with our domestic market?

The domestic market crashed big time in the last one month.

On 4th October 2018, the BSE benchmark, Sensex, registered its biggest point-wise decline in over eight months with the index settling 806.47 point lower at 35,169.16. It was further down by 425 points on the very next day.

Its NSE counterpart Nifty shed 259 points to close the day at 10,599.25 on 4th October 2018 and was down by 168 points at 10,431.

Analysts say the chances of the market drifting lower from here on are reasonably good, and it may not be the right time to start buying.

As a mutual fund investor, what should you do?

Let me first explain what is happening with the Indian stock market and why is it happening.

What really happened with Indian Stock Market?

In August 2018, the Indian stock market indices were at an all-time high, buoyed by a strong Q1 earning season and positive global sentiment.

Both the Sensex and Nifty have been registering phenomenal growth over the past few months, with very few instances where the markets have nosedived.

Sensex soared to close at 38,645.07 on 31st August 2018. On the other hand, Nifty rose over to touch a new peak of 11,680.80.

Since then, Sensex came down to 34,376.99 and its counterpart Nifty came down to 10,316.45.

Indian stocks have given up most of their gains for the year, but there may be more pain ahead.

The domestic stock market has lost almost $300 billion since August 2018, with concerns over defaults at private lenders adding to those over the impact of rising crude prices and a weakening rupee.

It’s now worth only $1.97 trillion, falling below the $2 trillion for the first time since August 2017.

Also Read: What Should Investors Do When Markets Decline?

Why is the Indian Stock Market crashing so sharply?

Crashes usually occur when the overvalued market sentiment takes an about turn with extreme momentum building up along the way. The process is much like a bubble-gum bursting and sticking all over one’s face.

Here are the 7 main reasons for the recent crash of the Indian stock market.

1. Rupee at record low 

Dollar dominated the last 24 hours as rupee collapsed to a fresh all-time low.

Policymakers tried everything, monetary intervention, verbal steroids and even tried to circulate rumors about an “oil window”. Nothing worked.

A falling rupee weighed heavy on investor’s sentiment. The local currency plunged to its fresh record low of 74 against the dollar early Friday.

The Indian unit on Wednesday crashed below the 74 mark against the dollar for the first time ever.

The dollar index stood tall against other currencies, boosted by a spike in treasury yields following the upbeat US data and comments from Federal Reserve Chairman Jerome Powell that were seen as hawkish.

2. Boiling crude oil

Brent crude was trading over $86 per barrel on Friday morning, while WTI crude was above $76 per barrel.

Market is reacting strongly to the Brent crude movement and with the current pace, there can be a higher fall in the market, if crude touches the 88-90 levels.

3. Rising bond yields

Hardening bond yields are creating waves of panic in the domestic equity market.

India’s 10-year bond yield was hovering above 8.18% on Friday against the previous close of 8.11 per cent.

Bond yields have spiked over 84 basis points, on a year-to-date basis.

4. Foreign capital outflows

Investors remained concerned over sustained foreign money outflows as foreign portfolio investors offloaded shares worth ₹455.02 crore in October so far.

They sold shares worth ₹1,488.96 crore in September.

However, their net investment stood at ₹262.72 crore in August, as per data available with depository NSDL.

According to the data released by NSE, Foreign Institutional Investors (FIIs) were net sellers of ₹2,056.87 crore in the index future and options segment, according to Friday’s data.

US Treasury yields reached multi-year peaks, with the 10-year note’s yield at its highest, since 2014.

5. Weak Asian cues

Subdued Asian markets spoiled domestic market sentiment too.

Japan’s Nikkei edged lower in choppy trade on Thursday morning as investors took profit from its recent rally to a 27-year high while automakers and technology heavyweights took limelight on news of technology tie-ups for self-driving cars.

Nikkei225 was trading 0.46% down at 23,999 while Hang Seng came down over 1.50% at 26,628.64.

Also Read: SIP is a Safe Bet: A Case Study of the Market Crash of 2008

6. Infrastructure Leasing & Financial Services (IL&FS) fiasco

Some organisations carry systemic importance for the entire financial industry.

IL&FS is one such.

It is the Indian equivalent of Lehman Brothers – and the world is well aware of the repercussions that had ensued when the now infamous investment bank was allowed to collapse.

The current financial mess at IL&FS is a testimony to inefficient cash-flow management and excessive leverage.

The debt-to-equity ratio of the company stands at approximately 20 and the outstanding debt of the company stands at Rs. 91,000 crore.

Several of its road, power and water projects are unviable today due to inordinate delays and cost over-runs.

The company operates through 24 subsidiaries and 135 indirect subsidiaries, and half a dozen associated companies -another reason that the problem at IL&FS has gotten out of hand.

It will be relatively difficult for NBFCs to raise money at the right kind of pricing in the immediate future. This will trouble the market further.

7. Current Account Deficit (CAD)

The stock market came under pressure after the widening current account deficit (CAD) data returned to haunt the Dalal Street after five years.

Current account deficit is a term used for a country’s trade situation where the value of the goods and services it imports exceeds the value of the goods and services it exports.

India’s current account deficit (CAD) widened to $15.8 billion, which is around 2.4% of the country’s Gross Domestic Product (GDP), for the quarter ended June as compared with $15 billion in the same quarter a year before.

The weakening rupee against the US dollar and high crude oil prices in the international market led to a rise in current account deficit in the first quarter of 2018.

What should mutual fund investors do?

The Market is one of the best teachers. It teaches investors how to rein in the seven deadly sins, including greed and envy.

Greed was the dominant factor.

We all think we will get out before the market crashes. Then inevitably, the market does crash and people get trapped, like a deer in the headlight.

By the time they muster the courage to do something, the market falls further. One way out of this cycle is to have a firm view on quality and valuation of a business we are invested in.

One should also understand that it is the nature of the market to rise and fall.

There have been such falls in the past and will happen in the future as well. But every time the market has recovered and reached record highs.

The market correction of 2008 was one of the worst.

However, all those who remained invested and picked up good stocks during the correction are sitting on humongous gains since then.

Let me give you the snapshot of the past falls of the Indian stock market.

#1. Crash of 1992

On 28 April 1992, BSE experienced a fall of 12.77% – its largest fall in history (in terms of percentage) due to the Harshad Mehta scam.

For all those who are unaware about Mehta, he was a stockbroker who is mainly remembered for manipulating the stock market.

He had a total of 27 criminal charges against him, but the one involving stock manipulation is what triggered the crash.

Sensex corrected by 54% in 1 year, it jumped to 127% post that, in 1 ½ years.

#2. Crash of 1996

Sensex plunged by 40% over a 4 year period. It jumped by 115% post that in little over 1 year.

#3. Crash of 2000

Sensex crashes due to IT Bubble burst.

It crashed by 56% in 1 ½ years, it jumped 138% in 2 ½ years

#4. Crash of 2008

In light of the world financial crisis of 2007-2008, the stock markets in also India fell a number of times in 2007 as well as 2008.

On 21st Jan 2008, BSE fell by 1408 points to 17,605 leading to one of the largest erosions in investor wealth.

BSE stopped trading for a while at 2:30 pm due to a technical snag, although its circuit filter allows swings of up to 15% before stopping the trading for an hour.

Referred to in the media as “Black Monday”, the fall was blamed by analysts at HSBC mutual fund and JP Morgan due to many reasons, such as:

  • Change in the global investment climate,
  • Fear of the United States economy going into recession,
  • FIIs and foreign hedge funds selling, in order to reallocate their funds from risky emerging markets to stable developed markets,
  • A cut in the US interest rates,
  • Global bourses (often referred to as event-related volatility),
  • Volatility in the commodity market,
  • Combination of global and local factors,
  • Huge build-ups in derivative positions leading to margin calls

Sensex crashed by 61% in 1 year, it jumped by 157% in 1 ½ years post that

#5. Crash of 2010

Sensex corrected by 28% in 1 year, it jumped by 96% in 3 years post that.

#6. Crash of 2015

The crash of 2015 was also a huge bolt to the Indian economy as it came at a time when the country was registering significant growth.

On 24 August 2015, BSE sensex crashed by 1,624 points and NSE fell by 490 points. Finally, BSE closed at 25,741 points and Nifty closed at 7,809 points.

The reason given for this crash was a ripple effect due to fear of a slowdown in China, as the Yuan had been devalued two weeks ago leading to a fall in the currency rates of other countries and the rapid selling of stocks in China and India.

Sensex corrected by 23% in 1 year, and got handsome returns after that.

#7. Crash of 2018

Markets have already corrected 10 to 15% from its peak.

WHAT NEXT?

From all the above crashes in the past, only one thing is common, no matter how deep Sensex nosedives, history still favors the bear.

Conclusion

Those who continued their SIPs during market falls benefited the most. Markets never give an indication before bouncing back!

So just be patient, you will recover the notional loss and as advised, if you can stop daily monitoring it will help you a lot.

There are a lot of factors you should take into consideration before selecting a mutual fund scheme that matches your investment goal.

Mutual fund investors in India may disagree on strategies and fund choices, but one of the few things that most would agree on is that investing for the long-term is an ideal method to maximize potential gains and reduce risk.

Investing in mutual funds online is simple and paperless. Simply log in to your Groww account, choose a fund, and invest using net banking – exactly like you would when shopping online

Happy Investing!

Disclaimer: The views expressed in this post are that of the author and not those of Groww