Indian stock market hit by tsunami; swim with the tide

When a tsunami hits it tend not to strike once. In fact, there are usually several cycles of a tsunami that are spaced out over time. Similarly the Indian equity market has been hit by the tsunami of flows. This flow is just getting stronger and stronger especially the domestic inflows. So the best thing for investors is to sit tight and not do anything foolish. The next wave would be the pension money. So far the increased allocation from the pension funds has not hit the market. Once that money come into the market, Nifty will see another rally of 4000 to 5000 points.

Meanwhile the inflow of money isn't stopping anytime soon. Low interest rates and lack of options in other asset classes has seen the money coming into equity market. The flow of money through systematic investment plan (SIP) has been the big positive and a game changer in the Indian equity market.

It's been the advent of Retail 3.0 in the Indian equity market and while it's not wide spread, it's much stronger, sensible and also has depth. The return of retail has just begun and it will certainly take time to become a larger phenomenon. The reason for it being stronger is also because the regulator is vigilant and is focused on ensuring no mishap in the market. In fact it's been heard that the government's only mandate for the regulator is they don't want any scam. They don't mind if retail don't come directly to equities but they shouldn't burn their fingers.

The slack in real estate and commodity has also seen money finding its way into the Indian equity market. Therefore it's not surprising that despite valuations being high, money is coming into equities and keeping the market high. However speaking of valuation experts still see quality being available in the market.

The market is discounting the future on the hopes that things will improve. Today the only fear is on the economic front. While the market has discounted high economic growth, the growth isn't coming. This is important. Similarly corporate performance too has to deliver. While the impact of GST will be known by the end of third quarter of FY2018, capacity utilisation has to pick up which is currently at 65-70 per cent. Similarly corporate India has to deleverage itself.

While there is talk of banks planning to acquire the assets of corporates with large debt and sell them to recover their money, nothing concrete is seen on the ground. This is because of the hair cut banks will have to take and no one is willing to take a steep 70-90 per cent cut on the value of the loan. Bankers feel resolution is better than litigation and this is the prime reason why banks aren't willing to take a huge haircut on the assets. It's not easy as one will also have to see how the banks provide for these loans if they are considered as NPAs. It has also to be seen if the banks can afford to take a huge hole on their P&L.

 Sale of assets is certainly an option. However, lower inflation is adding to the woes of India Inc as asset prices have plummeted. Until inflation rises, prices aren't going up which means debtors can't get the most from sale of assets. In short, near-term troubles of India Inc aren't ending anytime soon and banks and investors would feel the heat.

Meanwhile, for the market the tsunami doesn't seem ending. Even if money flow slows down and market corrects it not going to be a huge correction. In fact correction will be an opportunity to buy. One can argue on valuation and future growth but when one is hit by a liquidity rally you just need to swim with the tide and not against it. Even in this market investors would be okay to invest and the best way to invest in the current market scenario is to go through the mutual fund route.

If you are looking for a long haul getting in the market at these levels is still not a bad idea, the other best way to tackle volatility is to go through systematic investment plan (SIP). These days everyone on the street talks the same language advising investors to come through SIP. They aren't wrong as there isn't much option as investing directly into the equity market is riskier, especially in mid and small cap stocks.