Are The Equity Markets Headed For A Crash?

By BankBazaar | January 6, 2018

The Indian equity markets are scaling record highs. Is the euphoria here to stay? Or are we looking at a market crash in 2018? Read on to find out.

Are The Equity Markets Headed For A Crash?

Do you know the kind of returns the Indian equity markets generated in 2017? No? Just take a guess. 15%? Nah! 20%. Not really! In 2017, the Indian equity market saw a phenomenal growth of 28%. It’s true. Even Mutual Funds gave awesome returns.

Money poured into the market. Consider this: more than Rs. 20,000 crore was invested in the equity market in November 2017 alone. Wait! There’s more. Mutual Funds in India invested more than Rs. 1.1 lakh crore in the equity markets in 2017. In fact, fund houses made more purchases than sales every month in 2017.

They invested a minimum of Rs. 30,000 crore in the equity markets every month. No wonder the markets have zoomed ahead. Now, the question is, will this bull run last? What would possibly happen in 2018?

Additional Reading: Your First Steps To Investing In The Stock Market

Doomsayers elsewhere in the world are predicting gloom for the market’s equity indexes.  Why? Let’s look at the broad picture to get an idea.

The growth

Indian economic growth has actually slowed down. Our Gross Domestic Product (GDP) was 8% in 2015-16 and fell to 7.1% in 2016-17. This was, of course, due to a slowdown in manufacturing and services sectors’ growth. In fact, growth had fallen to 6.3% in the second quarter of 2017-18. This is one of the main reasons why experts are predicting a market crash in 2018.

However, India’s manufacturing sector seems to be looking up. The Nikkei Purchasing Manager’s Index (PMI) hit a five year high in December 2017. This will help push that GDP to 7% and upwards. Exports have risen by more than 30%. This is a six-year high. If this continues, one can expect a reasonable improvement in economic growth which will rub off on the equity markets, minimizing the possibilities of a big market crash.

Additional Reading: Why Mutual Funds Score Over Stocks

The earnings

Corporate earnings growth has remained muted in 2017. Experts attribute it to the effects of demonetisation and Goods and Services Tax (GST). This is another reason why investors think that the markets might crash in 2018.

Corporate earnings are expected to look up in 2018. In fact, the earnings to GDP ratio had hit a low last year. This means that this ratio will only go up this year. The second quarter results announced by companies have already shown a turnaround. Experts are predicting a 20% earnings growth across industries in 2018. Earnings for companies have been downgraded by brokerages so much so that there is room only for upgrades now. If corporates post good growth this year, then, a stock market crash will become a rumor.

The concerns

Everything seems to be on the bright side, but there are two major factors that might have a negative effect on the market. One is the trend in crude oil prices and another is the election that’s scheduled across states.

Oil prices recently hit a 2-year high. Brent crude prices have risen from $48 per barrel at the end of 2016 to $68 per barrel now. India imports more than 3/4th of its oil requirements. Higher oil prices will mean higher inflation. This might put a dent in the higher economic growth theory. This might also lead to higher inflation in the country. As you might know, higher inflation is a threat to the equity markets. This is something investors should keep an eye on.

Another point is that about eight states will be having their elections in 2018. This will include Rajasthan, Karnataka and Madhya Pradesh. Any adverse results for the ruling party in any of the states could mean volatility in the equity markets. Investors should keep track of this.

Additional Reading: What Really Affects The Stock Market

What’s the plan?

Invested too much in the stock market? Experts suggest that you create a fund in case there are losses in 2018. This is only if you need to cash in on those investments this year. If it is for the long term, you can leave them as they are. In case you are planning to use that money this year, cash in on those profits partially and put them in safe investment avenues such as Fixed Deposits or liquid Mutual Funds. Even if the markets crash, you will be happy that you made a good amount of money. You can also consider short-term debt funds.

Don’t want to get perturbed during market downturns? Choose the Systematic Investment Plan (SIP) route for investing in Mutual Funds as well as stocks. This will average out the cost of your purchase. You will be purchasing more during market downturns, which will mean great returns in the long run. Now, isn’t that a good thing?

Another thing that you should do is cut out the duds. Check if any of your funds or stocks have been underperforming for more than a year or two. Compare their returns to that of their peers. Significant underperformance? Returns lower by at least 5%? Then, maybe you should start looking at other funds or stocks that have done well. This exercise will ensure that you have only the best investments in your portfolio.

Additional Reading: Everything You Need To Know About SIP Investing In Mutual Funds!

Yet to start investing in equities? Actually, you needn’t wait for the markets to fall. Start investing in Mutual Funds for the long term. You can move on to stocks later. You can even invest in tax-saving Mutual Funds. So, stop timing the market and invest right away.

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Category: Equity investing ExpertSpeak

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