Volatility In Equities Is A Friend Of Investors

Equity markets had a sombre year. Most indices which had recorded strong performances from April 2016 till January 2018 cooled off as the year progressed.

- Anuj Sharma

However, the Large CAP / Frontline indices are not representing the scale of correction. For example, indices such as BSE Mid cap and BSE Smallcap have corrected by -20 to -30% respectively from the peak in January 2018 to September 30, 2018. Needless to say, many individual company stocks have had a far sharper correction in the range of -40 to -50%.

Many reasons are being attributed to rationalise the recent correction in markets, including default led by a large financial institution. However, we do believe that it’s futile to look for reasons; instead we believe that the markets have moved from an expensive territory to a more reasonable territory.

General economic and financial environment

The general economic environment continues to improve, stimulated with numerous reforms. This is also endorsed by the World Bank in its ease of doing business ranking for India, which has climbed to the 77th rank in 2019 from the 142th rank in 2015. However, benefits of these reforms are yet to percolate to the real economy. The key reasons for slow traction are the following:

Large capacity creation in the previous economic cycle, which is yet to be fully utilised. For example excess capacity in the power sector.

Impaired lending capacity of corporate banks as they were beleaguered by the NPA problem.

Slower than anticipated growth in the economy, especially in exports, is a function of global environment.