PERSONALISED INVESTMENT MANAGERS

What are the main trigger points for a correction?

30 August, 2021


          
            What are the main trigger points for a correction?

As an investor in the current market with a level of 58,000, are you worried?

There is absolutely no doubt that the markets are at a historical peak and look overheated. The data shows that it has been in an uptrend over the past 12 months to 14 months and has more than doubled from the Covid Market Crash in March 2020.


So what could trigger a drop?

The main pain points or trigger factors for markets to correct will be as below

1. A severe Third Wave of COVID-19

Currently, we are going through a semi-lock down, restrictions in movement, night curfew in various states etc. which are already in place.

  • However, if we look closely, the pattern is similar as compared to 1st lockdown in March 2020 and the full opening up in Dec, 2020 which led to the 2nd wave.
  • However, the main difference is that a relatively large part of the population has been vaccinated i.e. 55.47 cr. doses have been given (12.35 cr. fully vaccinated)– as on 17th August 2021 which will be an important factor to also consider going forward.
  • And also, by December 2021, Govt’s projection is that around 135 cr. doses will be available between Aug to Dec 2021 period and the expectation is that around 70% to 75% of the population will be vaccinated by end of 2021, which is expected to reduce the intensity of the impact of Wave 3.
  • Currently, though the spike is not visible, some are of the view that we may see a similar pattern to the first wave leading to the second wave but a milder impact.
  • Abundant caution of monitoring the covid cases and death is being done and carefully watched by Team Sinhasi.
2. Changes in Interest Rates in India

Currently, RBI has kept the interest rate at historically low levels and unchanged past few quarters and maintained an accommodative stance to support economic recovery along with better management of liquidity in the system. Currently, we are in the wait and watch mode, and we expect a hardening of interest rate in next 12-18 months period. We will keep you updated as and when the scenario changes.

3. Changes in US FED

The general consensus is that FED is expected to stop fresh injection of liquidity from beginning of 2022. There are already a lot of talks about tapering which we may see happen soon. However, if the economic growth in US continues to be strong, FED may consider preponing the stopping of this liquidity injection. However, the interest rates are expected to be at current levels in near future.

4. Market Valuation

Earning’s growth is the key to success for alpha returns while stock picking, be it in your PMS portfolio or MF portfolio investments. Keeping this in mind, fund houses with astute fund managers who are very well aware of this process and taking necessary changes as and when required, especially at current market levels.

If the fund management teams pick stocks, which are overvalued, and not able to generate returns out it, they will surely lag behind in terms of performance as compared to the peers. Sound fund managers and their teams are well aware of this issue and therefore conscious about stock valuation.

Please also remember that your equity investments in mutual funds and PMS schemes are NOT static but dynamic and keep changing as required by the fund managers.


We must always remember that stock markets are always ahead of the news. They are moving with an expectation of forward earnings potential and if the earnings do not support the expectation in future, markets will discount the same much prior to their earnings peak.

MIMI PARTHA SARATHY
Managing Director,
Sinhasi Consultants Pvt. Ltd.


 

What should we expect in terms of a market correction?

Anything can happen but we need to be well prepared. Some scenarios are:

a. Markets cooling-off with a correction of 15% to 25% i.e. 40K to 45K levels from current 55k level.

b. Markets remaining range bound – from 50 k to 55 k or more.

What actions should we take if and when this happens?

a. Plan your short-term requirements well and only add / keep monies in equity if you have a long-term horizon – i.e. 5 years plus.

b. Add long term money on market corrections - this is a must as this will push up the portfolio return further.

Returns in equity markets will NEVER be linear. They will always come lumpy over a 5 year plus time horizon as you have also experienced. It does test an investors patience and discipline indeed.


Remember that the key to sustainable alpha returns from your equity investments is to remain balanced both during times of market crashes, as well as euphoric times.

Reach out to us

If you would like to see the magic of working with financial advisors and planners who work to ensure that your financial goals are met to help you in every lifestage.

              

As an investor in the current market with a level of 58,000, are you worried?

There is absolutely no doubt that the markets are at a historical peak and look overheated. The data shows that it has been in an uptrend over the past 12 months to 14 months and has more than doubled from the Covid Market Crash in March 2020.


So what could trigger a drop?

The main pain points or trigger factors for markets to correct will be as below

1. A severe Third Wave of COVID-19

Currently, we are going through a semi-lock down, restrictions in movement, night curfew in various states etc. which are already in place.

  • However, if we look closely, the pattern is similar as compared to 1st lockdown in March 2020 and the full opening up in Dec, 2020 which led to the 2nd wave.
  • However, the main difference is that a relatively large part of the population has been vaccinated i.e. 55.47 cr. doses have been given (12.35 cr. fully vaccinated)– as on 17th August 2021 which will be an important factor to also consider going forward.
  • And also, by December 2021, Govt’s projection is that around 135 cr. doses will be available between Aug to Dec 2021 period and the expectation is that around 70% to 75% of the population will be vaccinated by end of 2021, which is expected to reduce the intensity of the impact of Wave 3.
  • Currently, though the spike is not visible, some are of the view that we may see a similar pattern to the first wave leading to the second wave but a milder impact.
  • Abundant caution of monitoring the covid cases and death is being done and carefully watched by Team Sinhasi.
2. Changes in Interest Rates in India

Currently, RBI has kept the interest rate at historically low levels and unchanged past few quarters and maintained an accommodative stance to support economic recovery along with better management of liquidity in the system. Currently, we are in the wait and watch mode, and we expect a hardening of interest rate in next 12-18 months period. We will keep you updated as and when the scenario changes.

3. Changes in US FED

The general consensus is that FED is expected to stop fresh injection of liquidity from beginning of 2022. There are already a lot of talks about tapering which we may see happen soon. However, if the economic growth in US continues to be strong, FED may consider preponing the stopping of this liquidity injection. However, the interest rates are expected to be at current levels in near future.

4. Market Valuation

Earning’s growth is the key to success for alpha returns while stock picking, be it in your PMS portfolio or MF portfolio investments. Keeping this in mind, fund houses with astute fund managers who are very well aware of this process and taking necessary changes as and when required, especially at current market levels.

If the fund management teams pick stocks, which are overvalued, and not able to generate returns out it, they will surely lag behind in terms of performance as compared to the peers. Sound fund managers and their teams are well aware of this issue and therefore conscious about stock valuation.

Please also remember that your equity investments in mutual funds and PMS schemes are NOT static but dynamic and keep changing as required by the fund managers.


We must always remember that stock markets are always ahead of the news. They are moving with an expectation of forward earnings potential and if the earnings do not support the expectation in future, markets will discount the same much prior to their earnings peak.

MIMI PARTHA SARATHY
Managing Director,
Sinhasi Consultants Pvt. Ltd.


 

What should we expect in terms of a market correction?

Anything can happen but we need to be well prepared. Some scenarios are:

a. Markets cooling-off with a correction of 15% to 25% i.e. 40K to 45K levels from current 55k level.

b. Markets remaining range bound – from 50 k to 55 k or more.

What actions should we take if and when this happens?

a. Plan your short-term requirements well and only add / keep monies in equity if you have a long-term horizon – i.e. 5 years plus.

b. Add long term money on market corrections - this is a must as this will push up the portfolio return further.

Returns in equity markets will NEVER be linear. They will always come lumpy over a 5 year plus time horizon as you have also experienced. It does test an investors patience and discipline indeed.


Remember that the key to sustainable alpha returns from your equity investments is to remain balanced both during times of market crashes, as well as euphoric times.

Reach out to us

If you would like to see the magic of working with financial advisors and planners who work to ensure that your financial goals are met to help you in every lifestage.

              


Do drop in a comment or suggestion (Please fill all fields)

All comments are subject to moderation