With the Indian stock markets, along with indices like the Nifty and Sensex, seeing ferocious correction today, the general advice from market experts to retail investors have been to ‘cherry pick’ stocks and rebuild one’s portfolio at these lowered valuations.
However, there are also those who go against this ‘mainstream narrative’ and urge a heightened level of caution on the part of investors, particularly given that foreign institutional players or FIIs — who largely control the direction of the Indian stock markets — have been selling relentlessly for several weeks now.
The current bearish tone in the market is seen as a reflection of impending interest rate hikes in the United States, the source of most of the money driving India’s stock markets.
In any economy, any increase in interest rates results in the shifting of funds from other assets to bonds and vice versa.
Jeff Chowdhry, partner at the US-based venture capital firm RLC Ventures, has been among those who have been warning against trying to catch the ‘falling knife’ in this market, trying to stand against the selling momentum unleashed by global institutional players.
Appearing on a TV show after the Nifty and Sensex sold off more than 2% today, Chowdhry described the global equity markets, including that of India, as being in the early part of a “fairly significant correction”.
He pointed out that contrary to what the headlines would have you believe, the prospects are not just a reflection of worries around the omnicron virus, but more to do with macro factors.
“It much more about the big picture, where we are in terms of the cycle,” he said, speaking on CNBC TV18 today.
“The issue is a very simple one for me, and it’s that we’ve had a number of years of easy money, we’ve had a number of years where the stock markets have gone up, and we’re now at a point where, effectively, that easy money is being taken away, interest rates are going up, and you’ve got a situation that despite the correction, valuations are still very very high.
“So I think people should tend forget about [questions like] whether this is a trading bounce, should be buy the dip etc etc, and look back and say: ‘Right, we have a situation now, where [we are in a] fairly significant correction, and in my opinion, we are not, by any means, through that correction at this point in time.”
SELL INTO BOUNCES
Chowdhry said there would always be bounces in the market even if the overall direction is down, and investors can use these bounces to reduce their vulnerability to macro factors.
“Short-term traders will come in and say: Right, this is very cheap. But let’s look at the big picture. The big picture is the following: These bounces should be sold, because interest rates are going up, valuations are very very high, and in that environment, you actually want to have very very low element of equities in your portfolio.”
He also pointed out that unlike in markets like China, in Indian stock market, the incremental money that often determines market levels is from foreign investors.
“That’s why it’s so significant, what’s going globally and the interest rates.”
SHIFT IN CENTRAL BANK POSITIONS
Chowdhry pointed out that there has been a change in the approach of central banks, such as the US Federal Reserve, in recent weeks.
“In the past, the central banks were quite happy for inflation to gradually tick up, by 1-2 percent. But now, we’re in a situation where even in the western markets, we are looking at inflation in the rates of 5 percent. In the UK, it’s at 5% now. In that scenario, they can’t obviously stand by and watch inflation get out of control.
“They are caught in a sort of a dilemma: Do they reduce interest rates because of the worry that inflation is going to start going up, even towards double digits, or [focus] back on the growth? In the past, there hasn’t been an inflation issue, so they haven’t had that dilemma. So, they’ve had a very very easy money [policy].
“Now, it’s a very difficult scenario for them. They have to start edging rates up, despite COVID and despite the fact that economic growth may be affected, and that’s why, from a stock market perspective, it is a very cautious environment that one is at this time.”