Correction, recession, inflation – Should the long term investor worry?, recession, inflation – Should the long term investor worry?

So how much more downside is left in the equity market? Are the bears going to continue their withdrawal from equity markets or will we have some respite?

It’s been difficult as a retail investor to commit and invest in equities when the overall market environment becomes volatile coupled with correction and uncertainties. The last few months have seen rather volatile movement in indices with downside bias.

Let’s look at some of the factors that are impacting the Indian equity market.

  • Ofcourse, the rising inflation has led the RBI to start increasing the repo rate.
  • Overall valuations are also stretched in some of the companies and sectors.
  • There are continuing outflows of FIIs in the past 10-12 months.


Global scenario

Overall global equities are also showing signs of weakness. The noise of the US economy heading towards recession is also getting louder. If the global economy does slow down considerably then the Indian economy will also not be immune to such slowdown.

The volatility index is high in the US equity market as the VIX is trading close to 30 for S&P 500 index. Nasdaq has been under pressure as major IT stocks have seen much sharper correction in the past couple of months. The US Fed is also increasing the Fed rate as inflation is at all time high in the US.

If we look at some other emerging equity markets like Vietnam, South Korea, Indonesia; the equity indices are down by about 18%, 12% and 15% respectively over the past one year. Again one of the reasons for corrections in these countries is the rise in inflation.

In comparison May 2022 saw selling of Indian shares crossing more than double the amount that were sold in the month of April 2022.

Outlook for Indian Equity

India’s Nifty index has witnessed a very strong rise to 18600 post the pandemic/ lockdown. Geopolitical issues in Europe resulted in an unexpected rise in inflation. With such a sharp surge, most central banks are hardening their monetary policies. This in turn is making the equity market more jittery about the future economic growth.

With uncertainty looming over the near term in the form of high inflation and increasing interest rates, we expect the equity market to remain under pressure till the market absorbs the interest rate hike cycle. How much more markets can correct or go down is anyone’s guess. But we can expect a period of consolidation with negative bias in the near term.

Infact, the next few quarters surely provides an excellent opportunity for a long term investor to start accumulating Companies with strong fundamentals. Investing prudently and in tranches would ensure accumulation of stocks and also not miss the bus if there were to be some “V” shape upswing in the market.


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