The most important single factor impacting equity markets now, globally, is the high inflation in the developed world, particularly the US, and the hawkish monetary response from the Fed.

V K Vijayakumar

Chief Investment Strategist, Geojit Financial Services

He is known for his articles on capital markets, wealth management, and Indian and global economy. He has presented many papers and delivered many lectures on the capital market in national and international seminars. He has authored four books on economics, presented eight papers in international seminars and 65 papers in national seminars.

After relative outperformance in 2022, the Indian equity market has been underperforming in 2023 so far. As of March 4, while the MSCI World Index is up by 4% year-to-date (YTD), Nifty is down by 3.3% YTD.

FIIs have been continuously selling and the number of active users at NSE has declined from a peak of 38 million in January 2022 to a low of 34.2 million in January 2023. Since October 2021, the market return has been poor.

Where do we go from here? What should retail investors do?

a) The March 2020 to October 2021 one-way rally was unique
The one-way rally in the market, which took the Nifty from the low of 7511 in March 2020, following the outbreak of the pandemic, to 18,604 in October 2021, triggered profound consequences in the market.

A sustained rally in the market and the work from home environment facilitated explosive growth for a number of investors in the market.

The number of Demat accounts exploded from around 4 crore in March 2020 to 7.38 crore in October 2021.

The newbie investors, who had little experience and knowledge of the market, merrily traded, and made easy money during this one-way rally.

b) Valuations pushed to high levels
During this euphoric phase valuations reached very high levels and FIIs started selling. FIIs sold equity for Rs 54,563 crore in 2021 and continued the selling spree with a sell figure of Rs 146048 crores in 2022. (Source: NSDL).

But the exuberant retail investors and the mutual funds flush with inflows absorbed all the FII selling imparting resilience to the market.

In the process, valuations were pushed to very high levels. Nifty trailing PE at 40 became unsustainable.

c)High inflation and rising interest rates in US have queered the pitch
The most important single factor impacting equity markets now, globally, is the high inflation in the developed world, particularly the US, and the hawkish monetary response from the Fed.

The US 10-year bond yields have shot up to 4% triggering capital outflows to US treasuries. Earlier this year Chinese reopening had triggered massive FII inflows to China and FIIs moved money from India to cheaper markets like China, Hong Kong, Taiwan, and South Korea.

FIIs have sold equity for Rs 36,426 crore in the first two months of this year.

d)Fixed income turns attractive
The MPC raised the repo rate to 6.5% by Feb 2023. This, along with impressive credit growth in the economy, pushed deposit rates to around 7. 5% making risk-free fixed income very attractive.

Real returns from fixed income are now in positive territory. From a near-term perspective, the high bond yields in the US and rising fixed-income returns in India are headwinds for markets.

With the US 10-year yields at 4%, the FIIs are likely to continue selling till valuations become attractive. For Indian retail investors with a short-term time horizon, 7.5% fixed-income returns are attractive.

e) Invest to profit from the potential wealth creation
The important lesson from financial history is that stocks outperform all other asset classes in the long run. This is true today more than ever before. The BSE Sensex has delivered around 14% annual returns since 1979.

These returns had come not steadily but in a non-linear manner. The story is going to repeat, going forward. Since 1992, India has been the second fastest-growing large economy in the world, behind China.

Now, China is slowing down, and India has emerged as the fastest-growing large economy. India has the best runway for sustained growth for many years to come and has the potential to be an $8 trillion economy with a market cap of around $10 trillion by 2032.

The wealth created through the stock market in the next 10 years can be three times the wealth created so far. In brief, the next 10 years may turn out to be the golden period for investing in India. This should be the overarching theme that guides investors in their investment journey.

(The Chief Investment Strategist at Geojit Financial Services)

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of
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