The Markets have been extremely volatile. Over the last month BSE Sensex is down almost 5%. But more importantly Mid Cap and Small Cap  Indices are down almost twice that. There is definitely a need to put things in perspective.

However, before doing that, let me summarize some of the points made in the last few MojoTalks.

1. To understand the Indian market, one should not forget the global factors. In fact the way markets behaved in 2017 was a lot to do with what happened in the rest of the world.
2. Based on the Four phases of a bull market, we are in the Optimism phase. In fact, we had also seen some signs of Euphoria in a few areas.
3. Currently we are experiencing an “interruption” to the optimism. The pockets of Euphoria seem to have disappeared. Global factors and the budget have played a role.
4. The December Quarter results show that Corporate India is in fine shape. Most of the large sectors are showing positive growth both in Topline and Bottomline and also the profitability is improving.

So, what is ailing the market?

The Global factors continue to play a big role. For 2018 I had said: According to most economists the broad based global growth will continue in 2018. Rising employment and Factors like US tax cut may also help. The one issue is that the surprise element of the current growth is no longer there. Global geo-political risks remain, risk of inflation and hence higher than expected increase of interest rates has gone up. Hence to expect the world to deliver another stellar year for the markets may be asking for too much. Hopefully we would still have a positive year, Fingers Crossed.

Over the last month, the global stock markets have been very volatile. VIX which is the measure of volatility and which hovered round a value of 10 for the longest time, suddenly shot up to 50 a few days ago and is now at around 20. In the same period US markets are down 4%+, UK market is down 5%+ and German market is down 6%+. 

A Bloomberg report says “The U.S. stock market only had a taste of the potential damage from higher bond yields earlier this year, with the biggest test yet to come, according to Morgan Stanley”.  So, the global markets are not helping.

Closer home we have our own issues.

Uncertainty of any kind is not good for the market. The valuation also becomes a factor especially when uncertainty increases. We know that the Indian market is not cheap. Along with the global uncertainty the uncertainty increased locally as well.

• The Budget, especially the re-introduction of LTCG and the government intent induced uncertainty.
• Some of the election results, for example in Rajasthan, have raised doubts in the mind of people about the 2019 elections. The political uncertainty has gone up.
• Finally, the PNB issue and the large write-offs by State owned banks have also increased uncertainty as to the health of the Public Sector Banks, which are supposed to play an important role as India’s Capex cycle picks up.

But there is some good news. The quarterly results show that Corporate India, at least in the listed space, is in good shape. Longer term positive impact of GST and Government spending in targeted areas, for example in Rural infrastructure, should also start helping.

So what now?

Volatility is an integral part of stock market investing. The volatility is higher than what one would like as the global uncertainty is adding to the local uncertainty and the valuations are not cheap. I continue to believe that the long-term fundamentals of the India story are intact. Also markets generally do not move into a long term bear phase in such an early phase of an economic recovery. Yes, Optimism phase has been interrupted but I believe that when the dust settles down the market will be back to fundamentals. The problem is that no one knows is how long the interruption will last. While remaining vigilant, I would keep the faith.

Would love to hear your views!