An article for direct market investors, MF investors and capital market participants.
Structured products can help protect the value of a portfolio in such scenarios.
The capital markets in India have been on a free fall over the last two months, leaving a lot of investors wondering about how big the market correction is and what could fuel the market rally again.
While dropping my daughter off at her school bus stop about a fortnight back, I met an investor who was worried that his investment portfolio, which dropped down about 30 percent from its peak level. He wanted my view on broader markets and advice on a stock which he was planning to invest in.
To guide investors and help them make money, I am penning down my thoughts on the recent events which impacted the Indian capital markets. I am also listing a possible solution to deal with notional losses arising due to market corrections using structured products at the end of this article which can be used by long term investors.
Let’s understand some data points by looking at the indices launched by the largest stock exchange in India–
Apart from the Nifty 50, there are multiple broad market indices, sectoral indices, strategic indices, thematic and fixed income indices. We are evaluating just a few of them to get some perspective.
Source – NSE website
Note – Index closing levels (18th Nov 2024) were considered for calculation purpose.
The indices in India have rallied significantly over the last 11 months with Nifty 50 generating returns of about 38 percent, Nifty Next 50 delivering 78 percent and Nifty Midcap Select delivering more than 50 percent. When the market goes up at such a speed, there is bound to be some corrections.
While there are multiple reasons for the markets falling, I am listing a few key ones below.
Slowdown in Earnings – When we look at the earnings announced by Nifty 50 companies for this quarter, more than half of them reported lower than expected net profits for the September quarter.
FII’s have sold for more than 1 lakh crores in the last two months – this is almost double of what they sold in March 2020 (covid 19 era) – I also hear that a foreign pension fund sold significant stake amid geopolitical tensions. Cant name the pension fund here. Indian markets are overvalued at the moment – FII’s finding other emerging markets more exciting, hence shifting their money from India.
The increase in tax during the budget announcement means Indian equities markets are not that attractive for foreign investors.
How much can the markets fall further?
I remember speaking to a friend (CEO of a startup) managing millions of dollars in mid-September (Nifty 50 closer to 26,000 levels) and asking him, what was fueling the market’s rally. His response was ‘It’s the continuous inflow of money. He mentioned to me that according to our analysis / indicators, the markets will fall down a few thousand points in no time but, we cannot predict the month.
The markets have given extraordinary returns since Nov 2023, so there could be few investors who would book profits by selling their holdings, this can put selling pressure on the markets.
During COVID-19, the markets fell by 37% from its peak in just two months. While we may not witness such a severe fall, there is a possibility of another 5-10 percent fall, reference technical analysis and considering that the earnings of broader markets may remain muted for the next few quarters.
The correction also depends on other factors like the outcome of the upcoming election and sentiments in global markets.
When can Markets rebound or rally again?
When we look at the global markets, the US markets (Dow Jones, S&P 500, Nasdaq) have been doing well and have been trading around their all-time highs. With a stable government (Trump wins), fed to cut interest rates, the economy is expected to get reforms and a policy boost. So there is limited risk on that side.
India has been witnessing challenges on the domestic front.
Reference the voting on Nov 20 (this week) in Maharashtra and Jharkhand, if the current government can win majority seats and form the government without too much support from regional parties. This can be a sentiment booster in the short to medium term. It would also ensure that there is no significant downslide correction for Indian markets from here and markets can stabilize here.
The other major triggers for Indian markets and other global markets could be peace between countries which are currently at war. If there is any unexpected resolution between Russia, Ukraine, Iran and Israel, this could also reduce the volatility.
What should you do?
Do not get out of markets amid this correction by selling your holdings in case you are a direct investor or stopping your SIP if you are a mutual fund investor. One can consider adding 25 percent of fresh money, if there are surplus funds, and keep adding in case of further market corrections.
Equity markets go through cycles, while there are challenges for the next few quarters, but there are expectations of strong earnings from the second half of next financial year.
Become a smart Investor – Protect your portfolio (For DIY direct market investors)
Some smart investors use structured products to protect the value of their portfolios during such corrections.
If you have a large investment portfolio, you could consider using structured products to save the value of your portfolio. These products are generally used by hedge funds and UHNI.
Structured products are complex products created with equity derivatives for hedging. Usage of such products requires a deep understanding of the same.
Note – views are completely personal.
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