Please find below five charts that explain the current equity market correction and provide an action plan to navigate through it effectively.

 

1) We All Fall Down - No Place To Hide:

 

The Indian equity market has been undergoing a correction since 27th September 2024.

 

Over the past three and a half months, the broad equity market (Nifty 500) has declined by -13.55%. During this period:

• The Nifty 50 index fell by -12.15%.

• The Midcap 150 index dropped by -13.58%.

• The Small Cap 250 index decreased by -13.53%.

• The Microcap 250 index fell by -13.35%.

 

Smart Beta indexes, including Momentum, Low Volatility and Alpha 50, were also significantly impacted.

 

Defensive sectors such as IT, Pharma and Healthcare experienced the least corrections.

 

 

2) Zoom Out : Financial Year 2024-25 Performance:

 

Despite a recent correction of approximately 14%, the performance of equity indexes for this financial year remains positive.

 

Since 1st April 2024:

• The Nifty 50 has returned 2.78%.

• The Midcap 150 has gained 7.6%.

• The Small Cap 250 has delivered a return of 9.47%.

• The Microcap 250 has surged by 17.03%.

 

Additionally, the US Nasdaq has performed well, delivering a return of 16.41% during the same period.

 

Overall, equity markets experienced significant gains in the first half of the financial year and the recent correction has helped to remove excess valuation.

 

*Source - Ngen markets

3) Why are Equity Markets Correcting?

 

The global equity markets are heavily influenced by the actions of the US Federal Reserve (Fed) and the US government.

 

Since 18th September 2024, the US Fed has cut interest rates by a total of 100 basis points (1%). During this same period, the yield on the US 10-Year Government Security has risen by more than 100 basis points.

 

This is the first time in US history that the Fed has simultaneously cut short-term rates while long-term bond rates have increased by an equal proportion.

 

The rising rates are a response to returning inflation in the US, with market expectations indicating further increases in inflation.

 

Additionally, policies anticipated under the Trump administration, such as corporate tax cuts, increased tariffs and stricter immigration controls, are expected to be inflationary.

 

When interest rates are high, investors tend to prefer fixed-income products over riskier investments such as equities, emerging markets, crypto etc. 

 

*Source : ZeroHedge

 

 

4) How is the Current Valuation of the Equity Market:

 

The recent correction in the equity market has certainly cooled the valuations to some extent.

 

• Large Cap: The Nifty 50 has a price-to-earnings (PE) ratio of 21.25, indicating a valuation that is close to fair.

• Mid Cap and Small Cap: These indexes are still trading at relatively high valuations.

 

In the short term, large caps appear to be more favorable for investment from a valuation standpoint.

 

*Source : NSE

5) Big Recoveries After Equity Market Corrections :

 

Equity market corrections are a natural part of stock market investing and are expected to cause short-term volatility.

 

Historically, markets have experienced significant corrections since their inception.

 

The encouraging news is that markets consistently rebound, offering substantial returns to patient investors.

 

Table shows that major corrections in Indian equity markets since 2008 have been followed by impressive gains over the subsequent 12 months.

 

Currently, its a good time to invest in equities if you are underexposed and have a time horizon of five years or more.

 

Patience is key, so its important to hold onto your existing equity investments through the turbulence.

 

Action Plan:

 

Every investor is unique, with different goals, investment policies, risk behaviours, and time horizons. Therefore, a one-size-fits-all plan is ineffective.

 

We strongly recommend discussing your specific situation with us for personalised guidance before making any changes to your portfolio.

 

However, here is a broad roadmap to outline our thought process:

 

• If your current equity allocation is higher or close to your Investment Policy -  No action is required. Hold your positions. You can consider adding more equity if the market falls by an additional 5%-10%, provided your time horizon is more than five years. Continue with your SIP.

 

• If your current equity allocation is 5%-10% lower than your Investment Policy - You can invest in equity through SIP or STP. Additionally, consider adding more equity through lump sum investments if the market falls by another 5%-10%, given that your time horizon exceeds five years.

 

• If your current equity allocation is 10%-100% lower than your Investment Policy - You can invest in equity through trigger-based lump sum investments and SIP or STP. Continue to invest more in equity with each market decline, provided your time horizon is more than five years.

 

 

Investor Guidance: At current levels, it is prudent to invest only that money in equity which is not required for next 5-7 years. 

 

 

Read more similar articles in our blog - https://alphacapital.in/blog/

 

Best Regards

 

Dr. Mukesh Jindal CFA, CFP, CAIA, Ph.D.

Alpha Research

 

Disclaimer:  The perspectives provided reflect our expectations of the economy, market, and investments, which may or may not materialize. Investors are encouraged to conduct their own due diligence before investing.