What is affecting the markets?

Published On: 15-Feb-2022

We are currently in a phase of heightened market volatility led by a confluence of factors. Some of the ongoing concerns leading to nervousness in the markets are inflation remaining higher for longer, higher crude & gas prices and an accelerated rate hike cycle by the Fed. It hasn’t helped matter that the valuations around the globe have been higher than long-term averages. However, volatility is nothing new to equity markets and nor is anxiety around a set of factors which threaten to pull the markets down. As equity investors, we have to train our minds to withstand volatility and keep focusing on the ability of businesses that we hold, to create economic value in the long run without getting influenced by their market prices.

Let's discuss some of the events that are on top of investors mind

Direction of Fund Flows into India: The last couple of decades have seen a steady flow of foreign capital into India. India’s market cap is now USD 3.50 trillion which makes it the sixth largest is the world and provides it the ability to absorb incremental capital at a large scale. Not only have FPI flows been strong, but the trend has been similar in FDI flows as well. Further, in the last few years we have seen strong flow of foreign capital in the start-up ecosystem and as a result, India now has the third largest number of Unicorns in the world. This has led to a whole new set of technology companies come up in India and in fact even getting listed on Indian exchanges rather than getting listed overseas. We think some of these companies would scale up profitably and create huge value for their investors and stakeholders. Apart from steady consumer facing businesses in India, these technology companies would keep the interest of foreign investors alive. While in the near term the risk-off stance can lead to outflows from emerging markets including India, the long-term opportunities that India has to offer would lead to a continuing trend of foreign capital flows in the coming decade, like it has in the past decades.

Fed Tapering: The minutes of Federal Open Market Committee (FOMC) meeting has made it clear that there will be an acceleration in interest rate hikes as well as in its quantum. Due to the expected tapering by the Fed and also increase in interest rates, there has been a re-adjustment of asset prices leading to a sharp correction. The ability to tame inflation by effecting a steep increase in interest rates is being enabled in the first place led by strength in the US economy, low unemployment rates and strong profitability by US corporates. Therefore, while there could be volatility in the near-term on account of rate hardening, growth is a much bigger determinant of equity markets than any other variable. In the medium term, if growth remains strong, asset prices will follow that. It is noteworthy here that India’s best ever bull run in this millennium happened between 2003 to 2007, when market went up more than four times, mainly on account of strong underlying growth. During the same period, 10-year G-sec moved up around 250 bps points from slightly above 5% to close to 8%.

Impact of China: China being the second largest economy, certainly has an impact on global growth and global sentiment. Unfortunately, the news from China hasn’t been that great over the past year. The Chinese government in its objective towards promoting equality and common prosperity, has been slapping regulations and laws to control the dominance of companies in the Technology and Internet sector which has led to a freefall in valuations of companies in these sectors. In fact, some of the other large sized emerging economies like Brazil, Russia, and Turkey have also been facing their own set of problems. While this is bad news for all of these economies but to our mind this can lead to global investors increasing their allocation to India. India with its stable political system, stability in its regulatory framework and policies, fairly diversified and deep capital markets and finally stable currency clearly has an advantage.

The longer-term case for investing into India hasn’t changed and we feel that following factors will continue to be supportive in the coming decade.

  • Stable GDP Growth: Long-term Real GDP is expected to be at 6-7% and inflation is likely to remain around 4-5%, which means that y-o-y economic growth on a nominal basis is expected to remain at 11-12% over the next decade.
  • High Growth Businesses: The Indian corporate sector is vibrant with high quality companies, which will ride on this strong economic growth in the coming decade. Many of these are likely to grow faster than the underlying nominal GDP growth.
  • Revival of Earnings Growth: The prolonged period of muted earnings growth (since late 2014) of India Inc. is likely to reverse due to its low base.
  • Credit Growth Offtake: Over the last few years, the Indian banking sector and the Indian corporate sector have deleveraged their balance sheets significantly by raising equity and are now well prepared to capture the revival in economic growth.

Based on data, current valuations across several valuation measures are in the expensive zone compared to the long-term averages. The strength in forecast earnings growth provides support to equities even as the likelihood of mean reversion in valuations poses a countervailing risk. The strategy of systematic investment and periodic asset rebalancing is best placed to tackle the volatility inherent in equity markets. The most harmful strategy is to halt systematic investment in equities when volatility strikes. Remember lower equity prices equal more units in the fund for the same rupee investment just as higher equity prices equals lesser units in the fund.

One important lesson in investing is that one must be emotionally stable, take a long-term view and avoid leverage. While most of us know that equity has been the most preferred asset class to own in the long run but very few are able to stick with it patiently and allow the compounding to work wonders. Our simple advice would be to think in terms of decades and not quarters.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.


Fund manager disclaimer

Author Bio

Ajay Tyagi
Ajay Tyagi is Head of Equities at UTI Asset Management. He is a CFA Charter holder from The CFA Institute, USA and also holds a Masters degree in Finance from Delhi University. Ajay joined UTI in the year 2000 and has successfully carried out various roles and responsibilities across equity research, offshore funds as well as domestic onshore funds. He has won many awards and accolades for his performance both domestically and globally. Ajay presently manages our flagship equity scheme in India and is also the Investment Advisor to UTI Internationals range of India dedicated offshore funds.