The Indian market witnessed unprecedented growth in the last 1.5 – 2 years with Sensex soaring and breaching the 62k mark. Picking stock was once considered art but in the last couple of years everything turned out to be gold, one didn’t need to have special skills to pick a winner! In a way, the intoxicating returns fueled the market to grow further with investors pumping in more money. However, there has been this fear lurking in the back of the mind of the portfolio managers regarding the impending market corrections. Over the last month we saw a glimpse of market correction with the Sensex hovering around the 58k mark, but is it temporary or here to stay?
We know factors like supply-side shocks (for example lack of microchips hampering the automobile industry) along with the easy access to money has led to inflationary conditions. As a consequence, the US Federal Reserve is not only looking to put an end to quantitative easing by the end of March but also looking at multiple rate hikes. All these will have an impact on the market volatility leading to tough times.
The demand is not expected to fall in the short run hence we don’t expect the earning potential of the companies to fall in near future. However, an increase in interest rate will impact the cost of capital of the company thereby lowering the bottom line.
The rising crude oil prices impact the country’s balance of payment by increasing the current account deficit and inflation. A higher deficit will lead to the devaluation of the currency.
These days we can not write anything without mentioning Covid. The Covid has had a negative impact on the rural areas and the lower-income classes of urban India. It has wiped away jobs and as a result, disposable income from these people. This is clearly evident from the fact that the consumer companies have reported degrowth in their volumes. The government can either increase subsidies or make some policies that will lead to a direct transfer of funds to the people in need. However, both are two-edged swords as they will lead to an increase in fiscal deficits which will lead to an increase in government borrowings and devaluation of the currency.
The Ukraine – Russia tension has added to the woes, the fear of a war lurking is not great for the markets, especially in modern times where the economies are intertwined.
Considering all the factors, it’s prudent to conclude that the market will be volatile in the coming months, and chances of getting exceptional returns, as witnessed in the last couple of years are very slim.
The Enigmatic Pen 