Markets continue to be volatile: Here's why and the opportunities it throws up

Mumbai: The BSE Sensex dipped below the 35,000-level by plunging around 546 points in opening trade on Monday on heavy losses in metal, realty, capital goods, banking and oil and gas stocks amid a global rout in equity markets.

The BSE 30-share barometer tanked 545.95 points, or 1.55 per cent, to 34,520.80. The gauge had lost 1,216.50 in the previous four sessions following imposition of long-term capital gains of 10 per cent on equities in the Budget 2018.

All sectoral indices led by realty, metal, capital goods, healthcare and bankex were trading in the negative terrain, falling by up to 3.47 per cent.

The NSE Nifty was trading down by 173.80 points, or 1.61 per cent, at 10,586.80.

Asian markets dropped over 1 per cent following deep losses on Wall Street last week after a strong US jobs report and rising Treasury yields fanned fears of interest rate hike quicker than thought.

Why are markets going down? Here are a few reasons:

1. Investors are largely cautious on the back of crucial events such as F&O expiry and fiscal deficit.

2. Long-term capital gain tax introduced in the Union Budget 2018 may not be the real reason for markets to fall. If that was the case, Indian markets is mature enough to correct in the same day.

3. The correction is more to do with the global markets especially USA (Dow Jones suffers worst fall in two years amid fears of interest rate rise). Also Europe, the FTSE 100 recorded its worst week since April last year.

This is due to impact of a tightening job market on the prospects for inflation and a surge in bond yields. Fed's forecast is of three additional rate increases in 2018 and 2019 but markets weren't expecting a likelihood of rate hike in March which is hard to argue now.

Reason for early rate hike in USA:

Figures from the US job market on Friday showed wages rising at the fastest annual rate since 2009, as the American economy created 200,000 new jobs last month – a better performance than had been expected by economists. Improving levels of pay could lead companies to hike their prices to compensate for higher wage bills – leading to an inflationary spiral which in return will mean rate hike. This resulted in a sell-off.

These corrections globally are absolutely normal.

Since 1946, there have been 46 corrections of more than 10 per cent in US equities, or about one every 18 months, The current run of equity gains since the last such correction (at the turn of 2016) is 23 months. The last time it dropped by over 600 points was after the Brexit vote in June 2016 (and markets never touched those levels ever again!!)

This sell-off also caused a ripple effect leading to few of the over leveraged positions being cut.

Some other fears in the market:

Though GST collection hopefully will improve in next 3-4 months and tax collection will be significantly higher this year, inflation will firm up further. The retail inflation, which is at 5.21 per cent and above the central bank’s 4 per cent target, could rise more. This can be a worry for the RBI.

The market is also worried about the fiscal slippage issue, largely because of the degree of deviation.

And, moreover, midcaps are trading way too expensive to large caps.

But let's not forget the liquidity-driven rally in Indian markets will continue because the biggest driver for Indian equities i.e MF flows will slow down in the near future. The quantum will only go up as there is no alternative to equities.

A bull market correction is always healthy and should be used as an opportunity to pick up quality stocks.