Sensex cracks 4,000 pts in 24 days! History still favours bears
A study by ICICI Sec reveals the median correction of a bull market in India stands at 14%.
A study by ICICI Securities reveals the median correction of a bull market in India stands at 14 per cent. The median recovery time for market is usually 66 days.
The recent fall from the lifetime high levels has so far completed a month. 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.
What really happened?
What really changed for the market during the month was nothing that investors did not know. Crude prices were on a boil (from sub-$70 level to $75 a barrel), the rupee was on a free fall (it hit 70 mark for first time on August 14), US and China were exchanging trade sanctions and there were concerns over ballooning current account deficit (CAD). Incidentally, all of these happened before the Sensex hit its record peak in August. The after-effects showed up in September.
The market even ignored the lofty valuations.
Sensex traded at 26.40 times on January 29 against a 10-year P/E multiple of 19.40 times and five-year ratio of 19.90 times. After the first round of selloff, valuations eased a bit, but were still high at 23.50. When valuations are high, there is no margin for error.
Panic seeped in when the first IL&FS default came to fore. Its cascading effect was seen on NBFCs and the sentiment took a plunge. Suddenly, the market was reacting extremely negatively to the same issues it had been ignoring all the while.
The silver lining is, despite the recent selloff, India continues to be an outperformer other emerging markets on a relative basis.
October not a bad month
If investors are unlucky, they are on course to see the worst October in 10 years; the worst was, of course, 2008. The worst October of 2008 saw the Sensex crash 24 per cent, while in last 10 years, the worst was in 2009, when the index dropped 7 per cent in October.
Average October return for Sensex in last eight year stands at 3.6 per cent. In these 8 years, the index has given negative returns for October only twice, an 1.37 per cent drop being the worst performance.
The ICICI Securities study shows the post-budget correction in February was largely within the range of the historical median, when the benchmark index corrected 10 per cent and recovery happened within 55 days.
But have valuations moderated reasonably?
“Valuations, although above average, have moderated to reasonable levels. Equity valuations are no longer in risky zone, but negative stock price momentum may continue as was the case in earlier bull market corrections,” ICICI Securities said in a note. Key events to look forward to in the short term will be RBI policy outcome and Q2 earnings.
Antique Stock Broking said the near-term story is likely to be tempered in the wake of the ongoing liquidity crunch, as the market grapples with valuations that leave little room for surprises on the upside.
“The market has been weighed down by the dual impact of tightening liquidity, precipitated by the IL&FS default, and the rupee depreciation triggered by worries over escalating trade tensions and US-Fed tightening, leading to risk aversion. This is punctuated by a strong polarisation in performance between stocks based on earnings and quality risk. The spillover from liquidity tightening will shape near-term sentiment, while the long-term demand drivers look intact,” it said.
What should investors do?
Brokerage Motilal Oswal Securities says at 20 times FY19E EPS, the Nifty50 still looks rich. Its portfolio strategy is premised on “when the going gets tough, the tough gets going.”
The brokerage prefers largecaps to midcaps, given the premium that midcaps enjoy in a challenging environment, a potential slowdown in domestic equity flows and the forthcoming busy political calendar.
This brokerage prefers ICICI Bank, HDFC Bank, Axis Bank, Titan, Maruti, HUL, L&T, Infosys, HDFC and Sun Pharma from the largecap space and RBL, Ashok Leyland, Mindtree, Tata Chemicals, Team Lease and Emami from among the midcaps.
Brokerage IIFL prefers midcaps such as Raymond, Aarti Industries, NIIT Technologies, Mphasis and FDC from a 1-year point of view.