Stock market has been witnessing strong bouts of volatility of late as investors are nervous amid aggressive rate hikes, inflation, faltering growth and uninspiring earnings.
The market has many near-term headwinds to deal with. Investors look anxious to understand if the market is set for a long bearish phase.
A bear market is when the stock markets see long phases of selling leading to declines in the indexes and stock prices of companies.
There is no respite for the market as the geopolitical issues have pushed commodity prices higher while lockdowns in China have raised fears that the global growth will be moderate this year.
Earnings of the next two-three quarters of the Indian companies are also expected to remain mixed as rising input costs and low demand may exert pressure on the margins of companies.
The recent fall in the market and the near-term headwinds have raised concerns that the market may fall into the bearish trap. However, analysts still have faith in India’s long-term story.
"There are two possibilities – the domestic market corrects for say another two months and then starts recovering, or the market keeps falling and finally confirming an extended bear phase. We believe in the first possibility," said G Chokkalingam, Founder & Head of Research, Equinomics Research & Advisory Private Ltd.
Chokkalingam explained why the market may rebound.
"There are several reasons why we think the market may rebound: (1) domestic economy is relatively doing well, (2)the market also withstood a major sell-off by the FIIs, (3) valuation of the whole market, as well as that of many individual stocks, have moderated substantially; Sensex trailing PE has come down to 23 from an all-time high of 30, (4) despite inflationary regime, corporate performance in Q4FY2022 has been good, and (5) both retail investors and DIIs continue to support the markets," said Chokkalingam.
Another important factor that can save the market from a long bearish phase is the strong influx of domestic investors in the market.
The domestic investor base has doubled since the start of the Covid pandemic in March 2020 and almost five crore new investors have come into the markets, Chokkalingam pointed out.
Besides, a lot of existing investors also pooled more resources into the domestic equity markets post-March 2020.
"Despite the recent rise in the interest rates, return from the fixed assets remain very low in a single digit; metals are down; gold and silver also failed in the recent quarters to give any significant return or confidence; cryptocurrencies are also struggling to give returns now; real estate asset is lumpy one and less liquid. In this situation, coupled with a lot of liquidity created in recent times, are these retail investors going to panic and run away from the markets and cause a major bear market? We don’t think so unless the Ukraine war becomes a war of global majors directly," Chokkalingam added.
Ukraine war is a serious concern but any small indication of the war ending in Ukraine could set off a major fall in the oil prices and a rally in the domestic market. So, Chokkalingam suggests investors with at least another one-year investment perspective stay invested in the domestic equities while conservative investors may opt for 10 percent cash in the equity asset.
Some analysts believe the Nifty can give a negative return this year amid concerns over rate hikes, moderate economic growth, geopolitical issues and sustained foreign capital outflow.