Global Market Correction – What should investors do?

(Q1) What has been happening in equity markets in 2022?

The beginning of the year has been a roller coaster ride for equity investors who are witnessing a major global equity market sell-off on the back of 

(a) Rising inflation: Inflation in US is at 40 years high

(b) Rising bond yields: 10 year yield had recently crossed 2% 

(c) Fears of faster than expected interest rate hikes by the US Fed: Many are expecting 6-7 hikes in 2022 with the first 50 bps in March

(d) Geo political risk: Russia & Ukraine heading into a war

I have spoken about macros earlier & hence its not a part of this newsletter, you can read it here

(Q2) How steep is the market fall?

-       S&P 500 witnessed a correction (peak to trough) of 12% in 2022 so far

-       NASDAQ experienced around 17.4%

(Q3) Should equity investors worry?

(a) While Russia – Ukraine has been affecting markets lately but its sooner than later that markets will again start focusing on the real issue at hand which is rising inflation. War is not the real issue here. Yes some commodities may benefit in the near term in anticipation of supply chain getting hampered but its likely to be a non event soon.

(b) Focusing on Fed rate hikes, you will be surprised to know that historically, markets have actually gone up in the run up to the first rate hike

(c) History shows some other interesting observations,

- The speed of the fall did concern investors but such levels of drawdowns are quite normal as per historical data points

- Between CY2005 to CY2021, the average intra year drawdown for the S&P 500 index has been ~14.7%, highlighting that the current drawdown is not unusual in context to past market moves

- US stocks have historically performed well during periods when the Fed raised rates, as a growing economy tends to support corporate profit growth and the stock market. 

- In fact, stocks have risen at an average annualised rate of 9% during the 12 Fed rate hike cycles since the 1950s and delivered positive returns in 11 of those instances.

(Q4) Then why are market falling right now? 

(a) Such massive QE has never been experienced before & hence the effects of withdrawal are unknown. Potentially some $4-5T may be withdrawn from global liquidity over the next 3 years.

(b) US FED balance sheet has tripled to around $9T in the last 10 years

(c) $7T government debt is  maturing over the next 3 years

This is why we are experiencing near term volatality.

(Q5) What about India? 

5 out of the 6 fed rate cycles, India has seen positive returns.

(Q6) What should investors do? 

(a) Global Growth - We know the global growth is coming back. If the global growth increases by 1%, India will benefit 0.3 - 0.4% due to exports & capital inflows

(b) Low Interest Rates

(i) Vs pre pandemic, repo is down 2.25%. There is a huge 17-18L cr liquidity in the banking system which can be lent

(ii) Ofcourse the argument on rising rates because of inflation remains but an increase of 0.25% - 0.50% will still be much lower than pre pandemic levels

(iii) Corporate borrowings have and will continue to hugely benefit with these lower rates

(c) CAPEX

(i) There are clear signs of CAPEX returning in Housing, Infra as well as corporates (lower rates helping)

(ii) To quote only housing, the house price to income ratio is 4.5 times today across 20 cities, best in the last 20 years. There is demand for housing.

(iii) Loan rates today are sub 7% vs 9.5% 3 years back

(iv) Housing revival indirectly connects with 80 odd sub sectors & is a huge employment provider. Construction is the second largest employment generator

(v) We have also seen huge government spending’s after recessions

(d) China + 1 theme

(i) Some part of China’s share of global trade is expected to come to India due to Labour cost going up over the last decade in China, trade issues that China has with many, environmental challenges that china is facing

(ii) Production linked Incentive scheme (PLI) – Government is pledging to incentivise 4-6% of the top line over the next 5 years in 13 sectors upto the tune of 2L cr (This has been increased to more sectors lately). We have already seen the impact with Mobile handset imports also becoming zero.

(iii) Only the PLI is expected to increase the cumulative GDP of India by 1.5%

(E) Earnings

(i) Today we are roughly at 2.2 – 2.3 times PAT to GDP ratio vs our average of 4.5 times, upside possible.

(ii) From an FY23 perspective, with estimated EPS to be around 874 on nifty, we are trading at 18 times

For the above 5 reasons - Global growth, Lower rates, CAPEX, China+1 & Earnings, medium term looks good. Timing the market is a difficult art & hence use what ever fall is available to add to your high conviction portfolio but keep your return expectations low for 2022!

-------------------------------------------------------END--------------------------------------------------

This is the 5th newsletter & if you have liked the content, 'do comment' & let us know please. Also do subscribe to the newsletter & do like our company page Credence Wealth Advisor (Page link below in the signature) 

P.S. - This newsletter would not have been possible without the help of my good friends at the Cosmos Capital. Follow them for some very interesting content around international investing.

Until next Sunday,

Kirtan Shah

Founder & CEO

Credence Wealth Advisors