Markets experiencing heightened volatility, broader market corrections, time for rebalancing and risk management
The markets in the month of February traded in a narrow range and closed flat after making a new high of 22298 on nifty and 73413 on sensex on 23rd Feb’24. Nifty has given positive returns of 1.1% in the month of feb’24 and 0.3% so far in Mar’24. The markets have been facing resistance on the upside since Jan’24 with volatility. The same pattern have continued in Mar’24 so far with one big difference that many sectors and indices (like small cap & mid cap) have shown corrections which is even bigger at individual stock levels. This sentiment is being attributed to recent concern by regulator SEBI about retail investors over exuberance and valuation concern in mid cap and small cap. SEBI have asked Mutual Funds via AMFI to do stress test on their mid cap and small cap schemes (details explained separately). FII has been net sellers in Feb month and buyers in mar’24 so far whereas DII inflows have been continuously supporting the market. There is also a major event of National elections in coming month. Election commission of India has announced election in 7 phases from 19th Apr’24 to 1st Jun’24 and results declaration on 4th Jun’24. Further, global markets are also volatile. Hence Indian market (Nifty & Sensex) has remained sideways and volatile.
SEBI direction on stress test of Mutual Funds
SEBI recently expressed concern that froth is building into Midcap and small cap mutual funds considering the run up these stocks have seen in a year. In 2023, mid-cap funds attracted nearly Rs 23,000 crore, while the small-cap schemes saw an inflow of Rs 41,000 crore. In 2022, mid-cap funds had an inflow of Rs 20,550 crore, and Rs 19,795 crore in small-cap funds.
SEBI wants to ensure that fund houses have enough liquidity and a plan in place to sell the stocks to handle unexpected redemptions in the mid cap and small cap schemes. The Association of Mutual Funds in India (AMFI) had asked AMCs to conduct stress tests on their schemes based on last month’s data and disclose the findings before March 15. After this, they have to disclose the numbers every 15 days. By testing this, SEBI aims to Protect Investors by ensure mid cap and small cap fund has enough liquidity to handle unexpected redemptions and keep Funds prepared if it happens. This test will check how quickly small-cap and mid-cap funds can sell 25 per cent and 50 per cent of their holdings.
The Result: Each fund has now disclosed how long it would take to sell 25% and 50% of their holdings. This gives investors an idea of how easily they can get their money back from the fund. It would take an average of about 6 days for mid-cap funds to liquidate 50 percent of their portfolios and about 14 days on average for small-cap funds to liquidate 50 percent of their portfolios if equity markets were to collapse badly, investors rushed for redemptions and liquidity in the markets dried up. Further detailed results of all Mutual Funds and analysis can be referred in the link below (source: value research)
Should investors worry?
Liquidity is just one of the many parameters that determine a scheme’s worth. And it is not the only thing that determines its long-term performance. SEBI has asked fund houses to publish their stress test numbers every 15 days. Investors should not panic. The regulator merely wants to throw light on small-cap and mid-cap funds to bring granular stats into the public domain so that investors understand what they’re getting into.
Moreover, the stress test imagines the worst-case scenario, the stress test results (number of days required to liquidate its portfolio) reflect that situation, not today’s. Besides, the quality of the companies also matters; the stress test is just one way of looking at a portfolio’s worth. The stress test number, if looked at in isolation, is therefore misleading. Do not redeem from any of these schemes just based on their stress these numbers. But it’s a good exercise to do when markets have gone up significantly because calamities don’t come knocking.
Sectoral performance & outlook
Markets are volatile and sideways since start of the year, volatility has increased with spike in India VIX and this is also across most sectors. Nifty is down only 2.35% from its all-time high of 22,526. However, when you look beneath the hood you know what’s ailing the market. Nifty realty is down -11%, smallcap -10%, metal -7%, midcap -7%, fmcg -6%, auto -6%, banknifty -5%, pharma -5%, IT -3% down from all time high. Here’s what the data of top 746 companies by market capitalisation including small cap suggests a) 16% companies fell less than 10% from all time high b) 37% stocks fell between 10% to 20% c) 32% stocks fell between 20% to 30% d) 11% stocks fell between 30% to 40% e) 4% stocks fell more than 40% from all time high. This explains the situation, corrections with analytics. The volatility is continuing this month as well with corrections continuing across sectors, mid cap and small cap. The large cap stocks and few sectors like pharma, IT and FMCG may provide some stability to the market and portfolio.
Outlook for the Indian Market
Amidst global economic uncertainties, gold emerges as a beacon of stability and opportunity. Its in-built characteristics provide a hedge against inflation, geopolitical tensions, and currency fluctuations. Hence, it is prudent to diversify assets with some gold in the portfolio all the time. Markets are volatile and expected to continue till election results and global markets experiencing volatility as well. The significant corrections in quality stocks and few sectors can be used as buying opportunity for long term investment. Clear Market direction is expected after election results in 1st week of Jun’24.
Fundamental outlook: As have been mentioned in the prior monthly outlook this year, the market may remain volatile and the first quarter sees volatility and corrections comparatively on historical basis. It is worth noting that the primary bullish trend has slowed down but has not yet changed. The global events and domestic events need to be tracked closely. Some rebalancing in the portfolio at sectors and market cap level is advised at this stage to take advantage of corrections; SIPs may continue and review it with your investment advisor.
Technical outlook: Indian market is volatile with minor corrections on basis of technical for this month. Nifty is currently trading still above short term and long term moving averages, however many sectors, mid cap and small cap are trading mix and below short term moving average. The RSI is in overbought zone of 70 to 75. The immediate resistance for nifty is 22750 and may face strong resistance at 23100 level. The immediate support for nifty is seen at 21350 and major support at 20750.
