Bears have engulfed the Indian markets with the benchmark indices falling to their 52-week lows on June 17, extending losses for the sixth straight session on the back of rising inflation, concerns regarding more aggressive monetary tightening, volatile crude oil prices and a weak global growth outlook.
Across the globe, markets witnessed a massive decline after the US Federal Reserve hiked interest rates by 75 bps, thehighest in nearly 30 years, even though it was on expected lines.
Back home, the BSE Sensex fell 575 points to its 52-week low of 50,921.22 in intraday deals today, while the Nifty50 shed 177 points to its 52-week low of 15183.40. The broader markets also fell in line with the benchmarks. Nifty Midcap 100 and Smallcap 100 declined around a percent each.
Experts believe that the US may need to act more aggressively to bring inflation under control. Most expect that Fed rates could reach 3.5-4 percent by next February. Jerome Powell says Fed could hike rates by 0.75 again in July. He also said that Fed has tools, and 'resolve' to bring inflation down. “I do not expect moves of this size to be common, but an increase of 0.5 or 0.75 percentage points is likely at its next meeting," Powell said.
In a recent note, Nomura said that Fed will likely need to move rates more deeply into the restrictive territory and that it expected a terminal rate of 3.75-4 percent by March 2023, followed by cuts in 2024. The brokerage expects the balance sheet runoff to continue through 2023.
So what should investors do now?
According to VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, "The dominant theme impacting equity markets globally is the synchronized global monetary tightening and the consequent fears of economic slowdown. The probability of the US slipping into recession is much higher now. Markets are discounting these concerns. The PE of the S&P 500 is now around 16, close to the long-term average. Europe is trading at around 11 times. Markets will bottom out earlier than the economy does. In India, valuations have declined, but are even now above the long-term average. So, FPIs will continue to sell, capping a relief rally which can come any time."
He added that it is impossible to predict the market bottom and the ideal investment strategy now should be calibrated by buying high-quality growth stocks. Mutual fund SIP investors can consider increasing the amount of investment.
Meanwhile, Vinod Nair, Head of Research at Geojit Financial Services noted that the stocks in Indian markets trading at high valuations and sectors like IT and Metals are the most impacted firms.
In such a situation, he suggests preservation of capital is the theme by investing in a balanced portfolio of equity, debt and cash. In equities, he said, safe sectors will be those that are least impacted by inflation and aggressive policy like Finance and Services. Defensives like Consumption, IT, Pharma & Telecom can also be considered on a long-term basis, added Nair.
"The US Fed effect coupled with a delayed start to the southwest monsoon wreaked havoc as the Nifty caved in below 15400 for the first time in the last one year. As the street prepares for further front-loaded action by central banks in a bid to anchor spiraling inflation, its impact on consumer spending kept investors on the back foot," said S Ranganathan, Head of Research at LKP securities.
Pranjal Kamra, CEO of Finology Ventures advised that a planned investment strategy with a long-term view can help investors to avoid market volatility. He said that despite the rate hike environment, he doesn't think there is one single reason to not invest.
"Firstly, considering the kind of inflationary situation, it would be foolish to stay back. The interest rate hike might boost up yield in FD & debt instruments, but your equity investments can give you handsome inflation-beating returns in the long run," he stated.
However, he noted that as the inflation rates aren’t expected to cool off anytime soon, market sentiments are expected to be volatile, and more inclined towards pessimism, in the months going ahead.
Among sectors, Kamra said that asset-heavy businesses like automobile, capital goods, real estate and banking sectors are interest-sensitive, and thus they may witness profit and margin instability in the near term.
Whereas companies in consumer staples, pharma & healthcare are considered defensive and thus are expected to have a comparatively lesser impact, he added.
