Stock market corrections during the previous six weeks, volatility, and broader fears about inflation have alarmed investors who had been riding a one-and-a-half-year bull market.
Investors have been contacting brokers, financial advisers, and fund managers to inquire about when the good times will return. At least three equities market investors have stated in the last week that their portfolio has lost 10–20 percent in a month. There is a sense of despondency among these investors who have converted to day traders, as well as new investors who joined the markets with the expectation of making money on a daily basis.
The US Federal Reserve’s removal of stimulus and two rate rises — 25 basis points in March and 50 basis points in May — have resulted in a substantial outflow of capital from developing economies to the US. In addition, the Reserve Bank of India’s off-cycle surprise rate hike of 40 basis points on May 4, as well as its comments on inflation and additional rate hikes in the coming days, have kept the markets under continuous pressure.
The Sensex has dropped 4.8 percent since the RBI announced its rate rise on May 4. The mid-cap and small-cap indexes, on the other hand, are down 8.9% and 10.7%, respectively.
Auto is the only sectoral index that is trading higher than it was on May 2, while other sectoral indexes are down more than 10%. The metal index on the BSE has been the largest loss (down 18.7%), with consumer durables (12.5%), power (10.8%), and IT (9.8%) following closely behind. Even these investors are concerned about the drop in net asset values of mutual fund equity schemes.
While the economy has stabilised, the RBI stated in its ‘State of the Economy’ report released last week that there are near-term challenges due to weakening growth, elevated inflation, supply disruptions due to geopolitical spillovers, and financial market volatility due to synchronised monetary tightening.
While the extended Russia-Ukraine conflict has led to export restrictions by various nations and increased food costs, particularly for wheat and corn, as well as edible oils, crude oil prices have remained high.
Inflation is a major worry not only in India, but also in numerous other countries, where it has reached multi-decade highs. In April, CPI inflation in the United States was approximately 8.3%, while in March, it soared to 7% in the United Kingdom, the highest level in the data series. According to the RBI study, annual inflation in the Eurozone hit a new high of 7.5 percent in April, led mostly by energy and followed by food, alcohol, and cigarettes. China’s inflation surged to a five-month high of 2.1 percent in April, as supply pressure deteriorated due to lockdowns, the most among the BRICS nations.
Leading market analysts believe the broad indexes will continue under pressure in the short term due to inflation fears, FPI withdrawals, and overall domestic and global GDP concerns. The increase in interest rates due to inflation is projected to boost the cost of capital and working capital requirements, putting pressure on company margins and potentially affecting profitability and share prices in the coming quarters.
Investors concerned about their portfolio’s value dropping in the previous month should remember that equities are a risk-bearing investment category that is prone to short-term volatility, not a monthly guaranteed return product. As a result, only invest in shares a sum that can be held for at least 3-5 years. They should also keep in mind that when market circumstances are bad, mid-cap and small-cap firms are more sensitive and exposed to bigger corrections. In times of market instability, investors should seek sanctuary in blue chip businesses or large cap mutual fund schemes or balanced advantage funds.
