Why Indian Stocks are Falling? What to Do in this Correction?

In last 1 week, Nifty Index has moved down by nearly 2.4%. That doesn’t looks a Big fall at all. But when we look at the Midcap and Small Indexes, then selling pressure definitely appears strong. Both index are down 7-8% since 19 October.

Specifically, many power, chemical, pharma, Technology, High PE category stocks have seen a downward pressure on stock prices.

So, what is not going in favor of the market?

Institutional Investors have sold a big quantity of shares in recent days. That could be one the major reasons for increase in supply of shares forcing stock prices to go down.

However, there are some reasons that could be prompting Institutional Investors to sell.

Profit Margins coming under Pressure

Result season has started and many Big companies have already announced their earnings for July to September period. Considering market rally in recent months and prices of shares, it can be assumed that investors were expecting a significant improvement in financials of many companies. But that doesn’t seems to be happening for many stocks.

Recently, Asian Paints announced their results where Revenue growth was good, but margins were under pressure. Net Profit Margin came well below 10% that was a disappointment. As per management, Steep rise in the raw material prices was among the main reasons for that.

Havells also recorded miss on profit front. Management claimed high commodity prices as the primary reason. Many other companies facing similar situations.

High Attrition rate in IT Industry will impact Margins of the IT companies because Technology companies may have to hike salaries and do a lot more things to retain the talent and gather better employees.

Gas and Oil prices are consistently rising which may pose a challenge for many companies to sustain the profit margins.

Anticipation of Rise in Interest Rates

Hike in interest rates is generally done to control the inflation. Higher rates will increase the borrowing cost, impact demand coming from the consumer, and therefore rising prices are supposed to come under control.

Beside of impacting demand, rise in Interest Rates may also impact money flow in the stock markets.

As of now, RBI has not indicated any hike. But they would remain laser-focused to keep the inflation under control. There are expectations that Bank of England (central bank of UK) could be the first central bank to raise interest rates. It may happen by 2021 end.

Rising Energy prices, strong recovery post pandemic and disruption in global supply chains are some of the factors helping inflation. Though inflationary pressures may still have not hit the roofs in real sense because Demand supply mismatch is expected to stabilise with time in many areas, it can’t be ruled out that there is no possibility of interest rates hike in short term.

New Varient of Covid

As of now, things seems to be quite comfortable and under control. But the news is that new varient of Covid having name AY.4.2 has been detected in many parts of India.

In UK, covid cases are on a steady rise possibly due to this varient. In China, nearly hundred new covid cases have been detected in recent days which is a significant number for them as compared to last weeks. As per officials of Chinese Authorities, covid cases are rising due to Delta varients coming from other nations by way of tourists. Officials are expecting more jump in the covid cases in coming weeks.

In UK, authorities have suggested to take other covid precautions strictly and booster dose of vaccines as covid vaccines alone may not be a proper solution.

As of now, AY.4.2 varient of covid doesn’t seems to be a threat to stock market in India. But for now, we can’t say that Covid is finally getting over in India.

Timely Profit Booking or valuations appears HIGH?

There is no doubt that valuations of many companies had skyrocketed in recent quarters. Many stocks were available to sell at quite high prices. Also, if looked properly, it can’t be said that there are no major negative news and risks in the market.

So, why one wouldn’t use the current opportunity?

Therefore, timely profit booking by Institutional investors along with Investor sentiment getting impacted from the initial results of Bluechip companies could be the reasons why stock market is declining and why institutional investors are selling.

Since 19 October, FIIs alone have sold nearly ₹10,322 crore worth shares. If we combine the data of FIIs and DIIs net selling, then this number comes at ₹10,734 crore for the same period.

What should you do in this Stock Market Correction?

Corrections are always a good opportunity to accumulate shares of your favorite companies at lower prices. Correction also brings new stock opportunities for the investors. However, don’t buy any company blindly just because it is falling in recent days or available at big discount from 52week high.

Also, that companies whose sales and profits have jumped primarily because of steep rise in product (commodities) prices, and have quite high valuations should be handled with proper risk management.

Let me tell you a recent event.

When the graphite electrode prices were on a surge in 2017, Graphite and HEG were performing quite well in that period. During that phase, high electrode prices were not expected to go anywhere soon.

HEG even did BuyBack at the peak prices. Electrode companies planned significant capacity expansion plans during phase of High Electrode Prices.

However today, Graphite Electrode prices are no longer trading at that High prices and have come down quite significantly from the peak. Shares of HEG and Graphite India too have seen serious correction.

So, these kind of companies should be considered with proper risk if you buy them at High Valuations in this correction.

Do remember one more thing.

When our share is rising, we get blinded and ignore negatives of stock. When our share is declining, we take negatives of the stock too seriously and ignore positives.

Try to avoid this situation in Stock Market as much as possible. It wrongly impact our Exit and Entry Plans.

So, that is the end of this article.

Good Luck : )