Vijay Kumar Gaba

 The markets have been in a punishing mood for the past couple of weeks. Especially after the “path breaking budget”, the markets seem to be adjusting to the RBI’s rather tepid growth forecast for 2HFY23. Obviously, the RBI does not share the enthusiasm of the government over public sector capex triggering a virtuous cycle of growth led by private sector investment.

The narrative of geopolitics (Russia-Ukraine conflict) and Fed tightening scaring the markets does not sound credible.

Russia and Ukraine have been at war for three decades, since the dismantling of the USSR. Eight year ago, in 2014 Russia annexed one of the larger provinces of Ukraine (Crimea) and markets have not cared much about that, just like it has learned to live with the perennial conflicts between Israel and Philistine; US and Iran, South Korea and North Korea, India and Pakistan; etc.

The US Federal Reserve started winding up its asset buying program (QE) last year and announced its intent to hike policy rates once QE ends in March 2022. There is no surprise for markets in this. There is overwhelming empirical evidence to suggest that Fed rate hikes that control inflation but do not hurt the growth have been usually benevolent for equity markets, especially emerging markets. The most hawkish forecasts are projecting the Fed policy rates to peak at much lower levels as compared to previous rate cycles. Building a disastrous outcome for markets like the 1980s or 2000 due to Fed rates may be inappropriate since in those cases rates peaked at 20% and 6% respectively, as against 3.5% worst forecast this time.

The argument of money debasement and hence rates peaking at lower level is actually favorable for equities, since it allows higher valuations to sustain for longer.

Another popular narrative on the street is that the ongoing correction may be a great opportunity to buy. Millions of experts on social media are saying with the benefit of hindsight that all such corrections in the past were great investment opportunities which people regretted later.

I see their point, but would like to understand where we stand in the current market cycle? If the current market is not complete yet, we may experience material pain in the coming months. In the past two market cycles (2006-2009 and 2016-2020), the market had given up most of its gain towards the end. In fact, the smallcap indices ended both the cycle with net losses. In the current cycle we are close to 10% off from highs recorded so far in the cycle. Both Nifty50 and Nifty Midcap are more than 100% higher from the starting point whereas Nifty Smallcap is 200% higher from the starting point. Never have the market cycles have ended like this.

We certainly have a long way to go in this market cycle. If the peak has already been recorded, we may see 25-50% correction in broader markets; else we may have some distance to move north. More on this tomorrow.