January 15, 2021. Share markets see the biggest fall of the month. Frontline indices, Sensex and Nifty fall 1% each, creating panic in the stock market. Share market news is sending negative speculation signals. Despite the announcement of a $1.9 trillion stimulus package by the new US President-elect, the Asian market continues to send weak signals. The markets are now finding it difficult to move up.
What pulled down the Indian stock market?
The fateful Friday costed very heavily to Dalal street investors. With increasing restrictions in Europe amidst rising COVID cases, negative sentiment enveloped the Asian market as well.
On top of it, restrictions put as the parting blow of Donald Trump to China soured investor sentiment further. The blacklisting of several Chinese companies including the semiconductor producing, SMIC, and Chinese gas giant CNOOC has pulled down major Chinese stocks. Lockdowns in various parts of China are adding fuel to the fire.
This coupled with the fear of frothy valuations made many participants sell everything. A massive bout of profit booking pulled down the Indian stock market. Be it telecom majors or auto stocks, metal or pharma, all suffered a setback.
Is this indicative of an overvalued Indian stock market coming to correction or a steep fall lies ahead?
Most market indicators today are much higher than their long term-averages. The important ratio of market capitalization to GDP has crossed 100%. This is clearly indicative of an overvalued market. This has happened for the first time after the 2008 financial crisis now. This means the Indian stocks are in overbought territory. The market P/E ratio is also exceptionally high at this time.
Having understood this, the market valuation is definitely overstretched but it will be justified soon after the economy bounces back. So the current fall might be a minor swift correction but not a steep fall. There are many factors like power consumption, GST collections, and auto sales that are hinting at a swift revival of the economy.
How will the upcoming budget impact the share markets market in India?
The period before the budget announcement is very intense for any investor. Speculations over which sector will get a government push and whose shares will go soaring high starts much ahead of budget.
The Union Budget will be presented on February 1. It is being forecasted that to give a fillip to the Government motto of ‘Aatmanirbhar Bharat’, more employment generating sectors will be given a push. Automobile, textile, pharma, and infrastructure are all expected to benefit from budget announcements.
What should an investor do now?
With the stretched valuations and an all-time high market, investors should focus more on large-cap stocks and on reliable ones like IT. Retail investors going for risky stocks at this moment can be the biggest losing point. Hoping that economic recovery would justify the valuations, investing for a long-term view can continue even in the present market. Trying to time the market accurately is always futile. A disciplined cautious investing never hurts. A faster than normal economic recovery is expected to be underway.