Only three sub-indices (IT, Healthcare and Consumer Durables) ended up on Sep 30th compared to where they were on July 1st. Metals lost over 25% while Capital Goods and PSUs lost over 14%.
Easily one of the worst quarters for Indian markets since the excitement of a new government at the center in early 2014. Call it turmoil in China and the devaluation of the yuan or the Fed and the spectre of rate hikes or key legislation stalling in the Rajya Sabha, this quarter saw one of the steepest one-day fall in six years in the Indian stock market.
India markets “supposed” to fall more
Some analysts believe that the Sensex and Indian markets can fall some more based on current valuations. According to a Bank of America report:
In an environment fraught with global risks, the Sensex falls harder when valuations are higher, according to a report by Bank of America Merrill Lynch.
In the year following the European debt crisis in December 2010, when euro zone countries were unable to refinance government debt, the Sensex plunged 25% because market valuations were expensive (14% premium above the Sensex average price-to-earnings multiple) at around 16.6 times one-year estimated earnings.
Between March and May 2012, the Sensex fell around 6.8% over concerns of Grexit (Greece leaving the euro zone) because Sensex valuations were relatively cheap at 13.5 times one-year estimated earnings (below the average of 14.5 times).
Similarly, the Sensex dropped around 5.8% between May and August 2013 after the US Federal Reserve first hinted at a rate increase. Again the market valuations were below the 10-year average—at around 14.4 times.
It ends with:
At its current level, the Sensex is now at around 15.3 times one-year estimated earnings, which suggests that there is still quite a bit of scope for a further decline.
Funnily, the inference being drawn is “When global uncertainty is high, Sensex typically falls quite a bit. This time again, global uncertainty is high, but Sensex has not fallen that much. Hence, it is likely to fall some more.”
Negative global view
A global analysis of investment returns in 2015 suggests this has been one of the worst years so far.
Stocks, commodities and currency funds are all in the red, and even the measly gains in bonds are being wiped out by what little inflation there is in the global economy.
After three years in a virtuous cycle of rising share prices and unprecedented monetary easing, markets are now sinking as emerging economies from China to Brazil weaken and corporate profits slump. Analysts have cut their global growth estimates for 2015 to 3% from 3.5% at the start of the year, and the turmoil has added pressure on central banks to prolong their stimulus programs, with traders scaling back forecasts for a Federal Reserve interest-rate increase by year-end.
Local not looking so great for India either
Some other analysts believe the fall in India is not just a reason of global factors but the fact that earnings estimates are consistently being downgraded, even as Indian companies struggle to show “acche din” on their quarterly reports
The fiscal year 2016 (FY16) and FY17 earnings estimates for companies on the benchmark Sensex have been downgraded since the beginning of this fiscal year. Sensex earnings for FY16 and FY17 have been cut by 9.1% and 10.2% each, respectively, while markets have also plunged 9% during the same period.
From an environment of general optimism, markets seem to have swung the other way in the space of a few months. This generally suggests a decent time to buy. But then again, trying to predict economic macros and market direction is a fool’s errand. So, the Calm Investor’s strategy is to continue buying those stocks that tick the boxes on your investment checklist and not pay too much attention to much else.