Equity Market Outlook

- From the desk of Sunil Singhania

Either be down or use the down to your advantage!

The last few weeks have been very volatile and especially the August 24th global market crash has
shaken the confidence and patience of the biggest equity bulls. The Indian markets also fell sharply with
the Nifty/Sensex crashing by almost 6% in a day and the mid cap and small cap indices falling even more.

The obvious question - what is happening? Where does this end? What should an investor do?

In hindsight it is easy to decipher the reasons behind the fall. Chinese markets, Chinese currency
devaluation leading to a contagion effect to other emerging market currencies, commodities collapse
and eventually a global risk-off trade. India, initially was very resilient. However, it finally gave way
because of the huge outperformance vis-a-vis its emerging market peers and we had yet another "Black
Monday".

Many are even calling the current environment as it is 2008-09 type of scenario!

We surely and confidently believe it is not even closer to that. This sharp correction is more China led
and will at worst impact global markets for a short period of time. Some emerging markets had
fundamental problems and therefore they are under severe pressure. Commodities are under pressure
and economies which are commodity dependent are at the epicenter of this fall.

The reasons why we strongly believe that we are unlikely to be headed for global recession:

 Growth in World’s two biggest regions, namely US and EU remains steady.

 While manufacturing is weak, the service sector globally is performing very well. In fact, even
Chinese service sector is doing well.
 The recent oil price decline is supportive for most major economies, including a number of
emerging markets.
 Global interest rates remaining close to record low levels and monetary easing by major central
Banks will extend further.
Lastly, regions where growth is under pressure, market valuations are comparable to previous extreme
bear markets (e.g. Brazil, Russia, Indonesia).

As a matter of fact, India's attractiveness has increased owing to these global developments.
Commodities have been more badly hit and in fact that is the most positive news for India.

We believe India is in a sweet spot compared to the rest of the world.

Source: RMF Internal Research

In the history of financial markets, there will be very few markets like India which offer these kinds of
edges over the rest of the world both on short and long term basis.

Sharp corrections with a structural uptrend offers a compelling opportunity:

Sharp corrections (10-20%) are seen often within the structural uptrends seen in global as well as Indian
equity markets. We have analyzed similar corrections seen over the last 15 years that have proven to be
the best time to increase equity exposure.
Table: Bull market phases in Indian equities and corrections (Sensex Index)

Date Price Points From Bottom

Time
to
Bottom Peak / Days % regain Comments/News flow
From To
/ Peak Botttom taken Change earlier
peak
(days)
Start of the global bull market led by easy
Apr-03 Jan-04 2,960 6,194 259 109% -
liquidity
Jan-04 Jun-04 6,194 4,710 161 -24% 160 Surprising loss of NDA in general elections
Bull phase 1

Jun-04 May-06 4,710 12,612 686 168% - Bull market continues led by global factors
Global commodities sell off along with sell
May-06 Jun-06 12,612 8,930 35 -29% 120
off in select EM economies
Jun-06 Jan-08 8,930 20,870 573 134% - Synchronized global bull market
Great financial crisis led by US, sell off
Jan-08 Mar-09 20,870 8,125 423 -61% -
across region across assets
Sharp pull back in equities led by global
Mar-09 Nov-10 8,125 20,893 613 157% - (bottoming out, QE announcement by US)
Bull phase 2

and local factors (general elections)

Euro zone crisis, US ratings downgrade
and locally issues such as policy paralysis
Nov-10 Dec-11 20,893 15,175 406 -27% -
and anti corruption movement affecting
sentiment
Dec-11 Feb-12 15,175 18,430 63 21% Easing by ECB in the form of LTRO
Change in RBI governor, globally easing by
Feb-12 Jan-13 18,430 20,100 335 9%
major central banks
Jan-13 Aug-13 20,100 17,970 212 -11% 28 Fed tapering concerns led global sell off
Bull phase 3

New leg of bull run in India markets

initially led by global liquidity, supported
Aug-13 Jan-15 17,970 29,680 518 65%
by historic win of BJP with clear majority in
general elections
Slowdown in global growth (concerns of
China slowdown), Commodity price
Jan-15 Aug-15 29,680 25,742 216 -13% ?
correction and deflationary environment,
EM leverage issue
Source: Bloomberg, RMF

The above table highlight that there have been three bull phases (including the ongoing one) in Indian
equities in the last 15 years. While markets rallied 7 times in the bull phase of 2003-2008, there were
few instances when the market corrected sharply (more than 15%). However, in these cases market
regained their previous peak in a short period of time (3-4 months). Data suggests that this is a typical
characteristics of any bull market. Market movement is not linear and corrections are inevitable in any
bull run. Correction in a bull market is an opportunity to build positions.
3 year return after every major fall in sensex
Peak date Bottom date Sensex High Sensex low % fall from high 1 year return 3 year return
Feb-01 Apr-02 4,462 3,096 -31% 14% 93%
Feb-02 Apr-02 3,758 2,932 -22% 31% 163%
Jan-03 Apr-03 3,416 2,904 -15% 106% 317%
May-04 May-04 5,772 4,227 -27% 60% 245%
May-06 Jun-06 12,671 8,799 -31% 67% 77%
Jan-08 Mar-08 21,206 14,677 -31% 31% 33%
Oct-08 Oct-08 13,203 7,697 -42% 127% 133%
Jan-11 Dec-11 20,664 15,135 -27% 30% 90%
May-13 Aug-13 20,443 17,448 -15% 53% -
Mar-15 Aug-15 30,024 25,742 -14% - -

Source: Bloomberg. Past performance may or may not be sustained in future

Volatility is a part and parcel to investing but it's not a negative thing as it is generally perceived. In
general, it provides right opportunity to build positions in otherwise great companies. To reiterate, it
provides a welcome opportunity to increase allocation to equities.

Conclusion:

Indian macros have never been better; Oil at $43 and falling further , current and fiscal deficit trending
lower, subsidy burden falling, inflation at multi-year lows and a falling interest rate environment. On the
reform and growth front, things can only improve from here. Yes, it is taking some time to get the
economy kick-starting, but the direction is clear and trending up.

Source: Bloomberg

Keep the faith and Be Positive!

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