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The Economic Times
  • Nilesh Shah

    MD, Kotak AMC
    Shah has over 25 years of experience in capital markets. He has managed funds across equity, fixed income securities and real estate. He has studied at the Institute of Chartered Accountants of India. Shah has also co-authored a book - 'A Direct Take'. His dream is to go backpacking with his better half some day.

This market has a few reasons to go up and many to bring it down

The domestic equity market has been witnessing a lot of pain in past few weeks. If September was bad, October has been worse so far. The Nifty50 fell 6.8 per cent last month alone, and is down 12 per cent since August 31.

In September-October, the decline in the Nifty Midcap100 has been18 per cent and that in Nifty Smallcap 23 per cent. On year-to-date basis, the Nifty Smallcap index is down around 35 per cent. In the same period, the midcap index has fallen 23 per cent. The smallcap index has wiped out much of the gains of last three years. Hope our call for caution while investing in equities came in handy for our investors.

It is the default by a mega infra-finance company, which triggered this phase of decline. The market was already concerned by the ripples of this default. It got frightened further when rumours-led selling caused 60 per cent (intra-day) fall in the price of a major HFC. The equity market crash can be attributed to movement in debt market, currency market and credit market along with tight liquidity.

Uncertainty regarding NBFCs created anxiety among investors of a possible contagion effect. The lending activity has dropped drastically. Not many want to go out on the wicket and play anymore. If this is the way, the play may stop even before the referees come in. Already the market is seeing ghosts behind every curtain.

The good thing is that the policymakers have begun taking action. But market nerves remain jittery, and debt-holders have their risk sensors on high-alert. The market needs to regain its confidence and nerves need to be soothed. For that reason, regulators must begin to allay fears and demonstrate eagerness in resolving the problem.

On a larger note, the NPAs in the PSU banks and the current infra-finance issue have two things in common - transparency and accountability did not match the highest standards. As a result, corporate governance and capital allocation suffered, putting the whole system at risk.

This episode may have some lessons for us. There is a cycle in play. First, there is an over-optimistic lending for hyper-inflated projects, unviable businesses and unscrupulous promoters. Then, these investments go bust and the lending institutions need to be rescued.

Regulators need to increasingly come in at the time of lending itself. There is enough competence within the nation to bring in effectiveness and efficiency in the public-held lending institutions. Promoters, rating agencies, regulations, capital and technology must be brought together to create transparency and information. The market must be helped going forward to efficiently discover the lending costs.

Oil price and elections will be drivers of the market going forward. The market has downside if oil goes to three digits; and if the election does not produce a stable government. Markets have upside if oil corrects from here on and the election produces reform oriented government.

As of now, we continue to remain cautious. The market has a few reasons to go up and many potential causes to remain down. Although islands of opportunity have emerged, especially in the smallcap segment. Investors with long-term view can look at allocating funds in a staggered manner – either through SIP or STP. Investors can also look at allocating money to avenues like offshore equity funds to diversify, giving time for the domestic story to come back on track.

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