A perfect storm leaves stock investors in a tizzy

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By now, investors must have realised there are no islands of safety in the stock market at the moment. Conservatively, most equity portfolios might be down 15-20% from their highs. Those who have higher exposure to mid-caps, small-caps and international equities could be staring at bigger losses. The Nifty is bravely holding above the 16,000-mark and might be poised for a brief pullback but that does not reflect the destruction in investor wealth beneath the surface.

Strong earnings by select companies in the March quarter matter little as share price moves in them have been a case of one step forward, two steps back. Individuals, who made a fast buck in the past two years, are realising that making money in markets is not easy after all. Momentum traders have been the worst hit as stop losses have been triggered one after the other, precipitating the slide in some of the popular stocks. If such momentum portfolios get unlocked, mid- and small-cap stocks could be in for more damage. This broadly sums up the Dalal Street’s current situation on the ground.

A lot has changed for the market since January – most importantly, sentiment. When ET conducted a poll of top market participants, 16,000 on the Nifty was an unthinkable level for a larger section of the Street. Only 8% of the poll participants felt the Nifty could fall to 16,000-17,000. Now, 16,000 is a reality and analysts are wondering how much more the market can decline. Conditions are ripe for a further downside as selling by foreign investors is showing no signs of easing. Overseas fund managers, who track macro indicators for investing in a country, are less confident of the near-term prospects of Indian stocks. Record oil prices, a weakening rupee, soft demand and inflationary pressures are ticked off in their check boxes. Moreover, expectations of earnings downgrades over the next few quarters have picked up, raising questions about current valuations.

Foreigners have dumped Indian stocks worth Rs 1.45 lakh crore since January and have been on the longest ever selling spree since October. While there are India-specific issues, many overseas investors are inclined to go back to the comfort of staying put in their own countries or safer assets amid geopolitical hostilities. Some fund managers in Europe, a region that has felt most threatened by Russia’s aggression, are even forecasting a resumption of the Cold War which could mean new economic realities globally and greater uncertainty. China’s zero-tolerance Covid management, which is expected to drag down its growth, will likely hinder portfolio flows into the emerging markets equities basket, in which China has the biggest weight.

The bigger factor is shrinking liquidity globally as central banks battle inflation.

Earlier this week in the US, yield on the benchmark 10-year hit a new 3 1/2-year high of 3.20%, while the dollar soared to a 20-year record driven by the worldwide risk-off sentiment.

Concerns are mounting that the US Federal Reserve might not be able to tamp down inflation without sparking a recession there. What’s worrying the market further is that the already-stretched Fed does not have enough firepower this time to control both and might have to allow one outcome to play out.

Either way, that’s bad news for risky assets such as emerging markets, like India.

Morgan Stanley’s strategist Andrew Sheets put it this way: “We’ve just lived through a 12-year period where all sorts of assets outperformed the economy as monetary policy was unusually loose. We could have a period where assets underperform the economy as policy support reverses.”

A sharp dip and a rebound in the market may not play out in the months ahead unless the Russia-Ukraine conflict ends soon. This phase could test investors’ patience.