A stock market downturn, as and when it happens, invariably catches people, and usually these are always retail investors, off guard. We are seeing this play out in India’s leading indices over the past three months as well. In a sort of slow motion glide that seems to have suddenly picked up pace this week, provoking this article as well. India’s leading stock exchange barometers have all hit new ‘lows’. There is a need to qualify that word, because these are corrections when seen from the peaks these indices hit, all in September. So if the Nifty Mid-cap and small cap indices both hit their peaks early in September, the broader indices comprising the BSE Sensex and the Nifty 50, comprising larger cap stocks, actually hit their highs in the final week of September, on September 27. Today, while the large caps indices are down 155 points from their peaks, the mid cap and small cap indices are down 21 per cent and 25 per cent respectively. Of course, the correction in many hyped stocks is even worse.
For crores of retail investors who had piled into stocks after watching a breathless post-covid rally that rarely stuttered, it has been agonising, watching their ‘wealth’ evaporate. Especially when we consider how even at the peak, many complained that the rise has been driven by a few, select stocks disproportionately. Leaving only index fund holders uniformly happy.
So why did the markets correct so steeply?
The answer lies in the previous rise itself. Like almost all sustained bull markets, the highs the market saw in September was the fag end of a period of sustained growth, a lot of it is not justified anymore by the quarterly results many key sectors and firms showcased between Q2 and Q3. Worse, when compared to global peers, India’s markets were once again trading at a premium, at par with, or higher than most global markets bar the still frothy US markets. A premium, most foreign investors seem to have decided, is not justified in a volatile global environment. And followed it with almost 2 Lakh Crores of sustained selling since.
All the anecdotal and actual signals were blinking red, namely, the stamped like rush for IPOs among firms and investors alike, and perhaps the worst of all, a quiet reducing of stakes in many firms by promoters. As always, among all the reasons trotted out to explain these warning signs, perhaps the most silly, and eventually foolish one as always, was that ‘this time it’s different’. It never is.
India’s growth prospects have become almost mythical now, in how there is a bull case for 10 per cent GDP growth, yet, we always find our economy overheating at the first signs of a sustained period of 8 per cent growth or even less. Brought down by rising inflation, corruption scandals, or yet another election or oil price spike. The recent trend towards giveaways without a funding plan has not helped.
The final trigger for the slide in 2025 has largely been the Trump administration and its actions, threatened or otherwise. If there is one thing that the market does not like, it is uncertainty. And the Trump administration has added dollops of it to global trade and markets including India with its tariff threats and actions.
For many investors this is their first experience with a correction this sharp and long. And they will seek to find answers in every argument, right from the decision to raise capital gains tax on stock market gains, to the tougher rules for FII investments, or the government’s apparent pause on further public sector privatisation. Perhaps all of these make a good point, or perhaps not. After all, wasn’t this the year when domestic investors had all but made foreign investors irrelevant according to many claims, including from the government? Clearly not, as we can see. Quite simply, sentiment has turned, and from a change in direction, taken a complete U-turn it would appear. That is not quite as uncommon or improbable as it seems, as stock markets are prone to going to extremes in either direction. One feels we are quite close to the point where the downturn might have gone well beyond what fundamentals justify.
But readers will do well to remember that eventually, one thing that the stocks markets do best consistently is reward performance. So firms that meet their projections for three or more quarters without fail, will eventually find their efforts rewarded.
In India’s case, quality managements will always command a premium eventually, as we still grapple with worries on the corporate governance, especially at the end of a bull run that we saw peak in September.
So very simply, don’t panic, especially if you can wait for the market to turn. Even as we write this, the second advance estimates for GIP growth indicate that the economy grew 6.2 per cent in Q3, and is on course for 6.5 per cent for the full year, After slipping to 5.4 per cent growth in the second quarter ending in September 2024.
This is a time to stick to your high conviction stocks. Quality managements and a strong record have always found backers willing to pay a premium in India. For the rest of you, if the year delivered great profits till September for you, it might be time for some loss harvesting before the financial year closes. And yes, there is every chance that this action, multiplied millions of times over by many investors, will ensure there is no immediate respite in this financial year from falling markets. But in the new financial year starting April 2025, there is much to look forward to in terms of positive cues, including steps from the government to restore confidence. ‘Capitulating’ and selling everything at a loss at these lows with vows to never return will not be a good idea unless you really believe a low stock price will actually hurt the prospects of the firm behind it as well. If not, hold tight, the ride might be bumpy, but you can still reach the finish line happy.
— The writer is Market analyst and Group Editor, SaurEnergy.com