Markets Likely To See The Worse Before Getting Better

Domestic markets hardly reacted with a customary loud cheer when the US Fed postponed hiking rates last week. Monsoons had been showing a tardy progress. Foreign investors were keeping half a foot outside the exit door as the Brexit loomed. A bear overhang had already clutched the markets.

And now Rexit.

The RBI Governor’s announcement that he is not seeking a second term may just be the proverbial final straw.
Stock investors will have to buckle themselves up for a wild ride as these two major events – Brexit and Rexit - are likely to have a bearing on the currency, stocks, bonds, fixed income, and derivatives markets. In all, your portfolio could take a hit – a big hit.

Raghuram Rajan’s announcement will influence foreign institutional investors as they prefer a stronger and more stable rupee. Dollar returns are affected by how the Indian rupee behaves. When Rajan had taken up the mantle of the Governor of the RBI three years ago, the rupee was plunging as it hit an all-time low of Rs 68.85 in August 2013. FIIs like a bit of stability in the foreign exchange markets.

On the other hand, if the British vote for an exit from the UK, investors are likely to see the wild side of the global currency markets. So, in some ways, a domestic and global rollercoaster currency ride has just begun. All this heavy weighing in the currency markets will impact stocks for a while.

Investors with large and small holdings will have to fasten their seat belts now as volatility is not going away in a hurry. Investors, who had been drawn into the markets lately due to the recovery, are going to get hit the most.

And as the uncertainties are still unknown, for now, there may be no place to hide.

What needs to be watched is whether the sell-off snowballs into a landslide. Or, how long investors are likely to keep off the markets in the near term if things get worse?

The last time a recovery happened was when the valuations of stocks were somewhere around the 15 PE levels. Currently, stock markets are trading at around 19 PE. At worst, a similar sell-off could see the markets at levels of around 22,000 on the Sensex, or thereabouts.

But all is not lost just yet. A positive influence on the markets will be the rapid progress of the monsoon which had so far seen a 22 per cent deficit in June. The growth of the rural economy hinges on good monsoons, and now its progress will rub-off well on the markets.

The tailwinds in the Indian economy of rising consumption and the government’s rising infrastructure spends will keep earnings growth going higher in the medium-to-long run.

Another factor that cannot be ruled out is that a recovery could be fast and furious if the current issues are sorted quickly. As much as Brexit ‘no’ will have a positive rub-off on the markets, the appointment of Rajan’s successor will be crucial.

So, in the short run, keep your fingers crossed.

And in the long, on the ‘buy’ button.