Lessons for retail investors as Mr Market bursts valuation bubble

D-Street began this week with the worst single-day drop in the benchmark indices since April 2021. Markets have been sharply volatile and the drop in Nifty from its high’s is certainly not indicative of the wealth erosion in many retail investor portfolios.

If we were to decode the possible reasons for the drastic shift in sentiments, the most touted one is the Fed rate hike which tends to cause major FII outflows. With FIIs being on a selling spree in the past few months and considering the anticipation surrounding Fed’s move, this risk roughly seems priced in.

In fact, there are some pieces of evidence that indicate that Indian equities have largely performed well even amid rate hike cycles. For instance, in 2015-16 when talks of rate hikes were doing the rounds, despite some corrections, markets continued to rise.

Soaring inflation has also been the talk of the town, which fortunately in India, does not seem as ugly. With RBI’s undeterred comfort on inflation, this reason also is unlikely to be the linchpin of increased volatility. Lack of demand in gold, which historically is known to be an inflation hedge, also concurs well with this argument.

Moving on to the geopolitical tensions, the behaviour of market participants is not consistent with this emerging risk too. Generally, when such uncertainties cloud the skies, defensive stocks are hoarded. This certainly is not the case this time. On a year-to-date basis, cyclicals like Nifty Auto, Metals and Energy have outperformed defensives like Nifty FMCG and Pharma.

Therefore, while it’s only in anybody’s realm of imagination to predict market movements, this time around it seems that Mr Market needed a reason to prick the bubble of excess stock prices.

Resultantly, while Nifty has fallen nearly 6.5% since October, many stocks, especially the ones with higher retail interest, have seen even a more than 50% drop. Retail investors should therefore take a cue and instead of following the herd, should wisely build their portfolios to bear such market blows.

Event of the week
During the week, the spotlight was on India’s retail inflation which boiled to 6.01% in January 2022, marginally beyond RBI’s upper threshold limit of 6%. This is attributable primarily to the unfavourable base effects and this spike was more so driven by the hardening of prices of food, beverages, clothing and footwear.

Even though, as indicated by our central bank, inflation is likely to peak in this quarter, it may not soften as quickly as projected by it and hence becomes a key monitorable to decipher MPC’s normalization glide path.

While in India inflation has not yet become overly uncontrollable, the US continues to face decadal high inflation. January 2022 inflation in the US stood as high as 7.5% which paves the way for an even more hawkish stance to be adopted by Fed. In order to tame the soaring inflation, the expectation now is that there may be more than a 25 basis points hike in the upcoming FOMC meeting.

Technical Outlook

Nifty snip 19ET CONTRIBUTORS

The Nifty 50 index ended the week slightly lower. The short-term trend is gradually turning bearish, although the solid support level of 16,800 on the downside is still holding quite strongly. The BankNifty index, on the other hand, is yet to confirm any bearish structure.

The market is presently stuck in an uncertain zone between 16,800 and 17,600. Any breakout/breakdown on either side will very certainly spark a new course of action. We recommend that traders retain a relatively bullish outlook and begin longs only around the support zone, with strict stop loss below 16,800.

Expectations for the week
With earnings season behind us and given the overall sentiments, markets are expected to move in sync with global peers in the coming week. A close eye will be kept on the developments concerning the Russia – Ukraine crisis and considering the inflation overhang, market participants will also observe movements in energy prices.

Back home, due to the monthly expiry, volatility would be the main course of action for D-street. Further, given the assembly polls, political uncertainty will prevail. Investors are advised to remain on the sidelines till some stability is restored.

The Nifty50 closed the week at 17,276.3, down by 0.57%.

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)

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