Stock Investors: A perfect storm throws stock investors into a frenzy

By now, investors must have realized that there is no safe haven in the stock market at the moment. Conservatively, most equity portfolios can be 15-20% lower than their highs. Those with more exposure to mid-cap, small-cap and international equity may be looking at bigger losses. The Nifty boldly holds above the 16,000-mark and may be ready for a brief rebound but it does not reflect the destruction of investors’ assets below the surface.

The strong earnings of the companies selected in the March quarter are small because the share price among them is one step ahead, two steps behind. Individuals who have made quick money in the last two years are realizing that making money in the market is not easy at all. Momentum traders have suffered the most as one stop loss after another has started, due to the slides of some popular stocks. If such momentum portfolios are unlocked, mid- and small-cap stocks could face further losses. It broadly summarizes the current situation on Dalal Street.

A lot has changed for the market since January – most importantly, the feeling. When ET conducted a survey of top market participants, the Nifty at 16,000 was an unimaginable level for a large part of the road. Only 8% of poll participants think the Nifty could drop to 16,000-17,000. Now, 16,000 is a reality and analysts are wondering how much further the market could fall. The situation is likely to get worse as there are no signs of easing sales by foreign investors. Foreign fund managers, who track macro indicators for investing in a country, are less confident about the near-term prospects of Indian stocks. Record oil prices, a weak rupee, soft demand and inflationary pressures have ticked their check boxes. Furthermore, expectations of declining incomes over the next few quarters have increased, raising questions about the current valuation.

Foreigners have dumped Rs 1.45 lakh crore worth of Indian stocks since January, the longest selling since October. Although there are India-specific problems, many foreign investors are eager to return to the comfort of their home country or secure assets amidst geopolitical adversity. Some fund managers in Europe, a region that has been most threatened by Russia’s aggression, are even predicting a recovery from the Cold War, which could mean new economic realities and greater uncertainty around the world. China’s zero-tolerance covid management, which is expected to pull its growth, is likely to impede portfolio flows into equity baskets in emerging markets, where China weighs the most.

The big reason is that global banks are shrinking liquidity as central banks fight inflation.

In the U.S. earlier this week, yields on the 10-year benchmark reached a new 3 1/2-year high of 3.20%, with the dollar rising to a 20-year record driven by global risk-off sentiment.

Concerns are growing that the US Federal Reserve will not be able to reduce inflation without creating a recession there. A further concern of the market is that the already expanding Fed does not have sufficient firepower at this time to control both and may have to allow a result to play out.

Either way, this is bad news for risky assets like emerging markets like India.

Andrew Sheets, a strategist for Morgan Stanley, puts it this way: “We’ve only lived in a 12-year period where all sorts of resources outweighed the economy because monetary policy was abnormally weak. We may have a time when policy support is reversed and wealth weakens the economy.

If the Russia-Ukraine conflict does not end soon, there may not be a sharp decline in the market and a comeback in the coming months. At this stage the patience of the investors may be tested.