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The market is witnessing huge volatility right now. FPI sell-off continues, inflation is at record highs, interest rates are rising and energy prices are on the rise. In such a situation, further correction is possible in the market. Investors should focus on quality stocks.
Volatility is the nature of the stock market which cannot be avoided and that is why in the last few years after the outbreak of Kovid-19, the markets have investors ,Share market investors) has shown its many colors. After Kovid-19, the market was plunged into deep despair and after that there was a period of bull run for several months which took the markets to new heights globally. In recent months, especially due to Russia’s war against Ukraine, the market appears to be disappointed once again. The volatility of the leading index tells the whole story. BSE Sensex and Nifty-50 touched a high of 62245.43 and 18604.45 respectively on 19 October 2021. There was a sharp decline in 2022. Sensex closed at 55,796.23 and Nifty-50 at 16584.30 on June 3 amidst very volatile trading during the previous weeks. On the global front, the US trading index Nasdaq reached a 52-week low of 11,035.69 on 20 May 2022 from its 52-week high of 16212.23 on 22 November 2021.
Inflation had increased significantly in 2020-2021 to deal with the worldwide Kovid-19 and its supply chain disruption, which has made everyone realize that all is not well in the global economy. Developed markets, including the US and UK, are facing inflation at 40-year highs. India too witnessed consumer price inflation in April at an eight-year high of 7.79 per cent, creating an uncomfortable situation for the Reserve Bank of India as it has remained consistently above its target for several months.
In May, the Reserve Bank raised the repo rate
RBI Governor Shaktikanta Das expressed his concern after the off-cycle Monetary Policy Committee (MPC) meeting on May 4. “If inflation remains at these levels for too long, there is collateral risk, it can lower inflation expectations which can be detrimental to self-fulfillment and growth and financial stability,” he said. Rising inflation especially harms savings, investment, competitiveness and production growth. Das said rising inflation has adversely affected the condition of the poor section of the population by reducing their buying power.
effect of rising interest rates
No wonder that in such a situation, Das announced an increase of 40 basis points in the policy repo rate to check rising inflation, assuring that this move would keep inflation within the target. Concerned about inflation, the US Fed also announced the biggest interest rate hike in 22 years, raising its benchmark interest rate by half a percentage point from 0.75% to 1%. Higher interest rates reduce inflationary pressures but make credit costlier and act as a stumbling block to economic growth in the long run.
Interest rates will continue to rise
With global inflation likely to remain stable, further hike in interest rates is expected from central banks globally to contain rising prices. RBI is also expected to increase the policy rate by 80 to 110 points by March 2023. Inflation and rising EMI will leave less money in the hands of investors to spend. This can have a bad effect on the flow of the stock market.
The Russo-Ukraine war recently completed 100 days and there is no sign of when it will end which has given rise to further uncertainties for the stock market. Governor Das said, “The heavy sanctions imposed on Russia due to the war have disrupted the supply chain, leading to a rise in commodity prices. The economic effects of war are spreading far and wide through commodity markets, trade and financial relationships.
Energy prices may rise further
The main reason for inflation is rising crude oil prices which have been running above $100 per barrel for a long time. Kotak Institutional Equities, in its June 2022 India Strategy Report, said, “Energy (fuel) prices could rise further if all or a large part of Russia’s energy exports are removed from the global energy market as the US and the European Union It is expected to impose more stringent sanctions on Russia’s banks, financial system, energy sector, crude oil and gas. The global oil supply-demand situation is already very bad.
FPI migration continues
In view of the current trend of the Indian stock market, Foreign Portfolio Investors (FPIs) have pulled out a lot of their money from the Indian stock market in the last several months. While FPIs had invested a total of Rs 25,750 crore in Indian stocks between January and December 2021, they pulled out Rs 1,67,156 crore between January and May 2022. Had it not been for Domestic Institutions (DIIs) to invest Rs 1,85,367 crore between January-May 2022 to balance out FPI outflows, the market would have fallen further. The investment participation of retail investors has also been strong.
The biggest reason for the weakness of FPI’s selling
The May 2022 Motilal Oswal report on the market states that FPIs recorded withdrawals of $ 4.9 billion for the eighth consecutive month. However, the money withdrawn by the FPI was more than the investment of DII. DII made the highest investment of $6.1 billion in May 2022 since March 2020. However, experts say that the selling of FPIs may slow down. VK Vijay Kumar, Chief Investment Strategist, Geojit Financial Services, said, “FPI’s withdrawal from the Indian market is the biggest reason for the market’s weakness. However, FPI selling is showing signs of slowing down. FPI selling has been very less in the early days of June, if dollar and US bonds stabilize, then FPI selling is likely to stop.
tough journey ahead
However, the valuations may look attractive after the recent market corrections. This time around, investors may have to wait longer for a rebound until the Russo-Ukraine war reaches the final round of talks. The fear of inflation will also create difficulties for the market. If interest rates are hiked too fast, the economic recovery may be in jeopardy. This will be a difficult step for policy makers.
Market will remain under pressure
The impact of inflation and rising returns on corporate earnings has already been seen. Margins are under pressure. Companies with no profits and leveraged balance sheets are no longer in demand. In the current scenario, investors will be inclined towards stable businesses with cash generation capacity at a reasonable valuation. Those investing in equities should be prepared for market volatility in the near future. Selling in equity market gives long term investors an opportunity to make money. (Click here to read the news in English)