Even though the talks of aggressive rate hikes have been already there for the last few months, the market sentiment has turned extremely weak after the US Federal Reserve rate hike on September 21.
Investors have turned cautious globally. The domestic market has been falling since September 21; the equity barometer Nifty fell below 16,850 in intraday trade on September 29.
A Fed rate hike of 75 basis points (bps) was on the expected lines because of soaring inflation. After the pandemic hit the world, central banks infused massive liquidity into the financial system to support the economy which resulted in surplus liquidity and inflation. After the Ukraine war started, prices of commodities shot up which added to the inflation.
Central banks are now struggling to bring down inflation by aggressively lifting rates. But are rate hikes the only factor which is keeping the market low?
The answer is, no. It is not the rate hike, but the consequence of rate hikes -- in terms of a prolonged recession -- which has shaken up the markets globally. For the domestic market, the rupee's weakness and capital outflow are also major concerns. Analysts say that the short-term pain may continue and more aggressive rate hikes and deteriorating macroeconomic indicators and corporate earnings will aggravate the pain.
"The market is already factoring rate hike of 35-50 bps. However, uncertainty around global supply, likely recession in a few major global economies, elevated inflation level domestically as well as globally and weakening local currency are key factors putting pressure on global equity markets including the Indian equity market," said Mitul Shah - Head of Research at Reliance Securities.
"Recent sharp rupee depreciation against the dollar and surpassing the mark of 80 is a key concern at present. The weakening currency led to a faster reduction in our forex reserves in the last few months."
The Fed has been vocal so far in justifying its rate hikes and has said that it will keep hiking rates as long as required to bring inflation down. Fed has been saying that the rate hikes are necessary even though they will cause pain.
"Though rate hike was expected, the market had expected FOMC to pivot away from being aggressive. But the Fed has now paved the way for more sharp hikes by end of the year, leaving little room for upsides in equities. Though Indian retail inflation had softened in July, August saw CPI firming up to 7%. This, along with an aggressive Fed, raises the base case scenario of a 50bps cut or more from RBI," said Anand James, Chief Market Strategist at Geojit Financial Services.
The Russia-Ukraine war shot up inflation because of supply disruption. The war which started on February 24 remains a bigger threat to the world. Due to falling commodity prices and efforts of central banks, inflation is expected to come down. However, if the Ukraine war stretches for a longer time, it will have a far more severe effect on the West.
Last week, Russian President Vladimir Putin's threat to the West alluding to using nuclear weapons to protect the interests of Russia has raised worries.
"Putin's warning, which was followed by a more specific threat to use a nuclear weapon in Ukraine from an ally, might mean the Kremlin is considering an escalation after Russia annexes four Ukrainian regions which it only partly occupies," a Reuters report stated.
What should you do?
In the current turmoil, remember what one of the most successful investors of all time Warren Buffett has said: "Be fearful when others are greedy, and be greedy when others are fearful."
This market will remain volatile in the short term because of the headwinds. But the long-term prospects are intact and India is expected to outperform many global markets this year because of it being a domestic-centric economy. A recession in the US may have a limited impact on India.
In some cases, a global pain could be a gain for India. For example, a recession in the US will trigger a fall in crude oil and other commodity prices which will be a boon for India.
"We believe that further rate hikes in the western economies could lead to contraction of their economies and the same would lead to further weakening of oil prices. Thus, we continue to believe that 'the global pain would be India’s gain' and the Indian economy would come out of high inflation regime first, thanks to cheap oil and also due to successful monsoon," said G. Chokkalingam, Founder & Head of Research, Equinomics Research & Advisory.
"Except the goods exports, most domestic macroeconomic factors like faster GDP growth and expected moderation in inflation, rupee stability and arrest of continued fall in forex reserves due to steep fall in oil prices should help the domestic equity markets to recover in the short-term. Thus, we continue to believe that Indian equity markets should recover after every major fall in the short-term," said Chokkalingam.
This market is for long-term investors. Buy quality stocks on declines and wait for two-three years to get healthy returns.
"We expect a rebound in markets in the second half of FY23 (H2FY23), though near-term pressure would remain. Therefore, investors may start buying now in a phased manner as the recent sharp correction of the past few days has resulted in attractive valuation in a few cases. Buy on every decline would be the right strategy from now onwards," said Shah of Reliance Securities.
The markets are sentiment-driven in the short term and these are anything but positive right now. Short-term investors should keep betting in this market as per their risk appetite. Risk-averse investors can hold cash in the short term since the sentiment is weak.
"There are fears of a deep recession in the developed world and this is making investors nervous. They seem to be utilising every rally to book profits and take some money off the table. Besides, they are also being cautious in making a big commitment to stocks given all the uncertainty around," said Rahul Shah, Co-Head of Research, Equitymaster.
"Since short-term investors are mostly trend investors, the current sideways market must be proving to be a big challenge for them. Therefore, a better idea would be to hold some cash and re-enter only when a clear trend emerges," said Shah of Equitymaster.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of MintGenie.