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The Much-Awaited Stock Market Correction

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Correction Before Vaccination

By: Tavaga Research

The investors witnessed a widespread bloodbath in the markets today with the benchmark indices tanking as much as 4 percent intraday, in line with a selloff across the global markets. The Dalal Street saw wealth erosion of over Rs 7 lakh crore as investors took to profit-booking, amid weak global cues and concerns over a new coronavirus strain in the UK. Market Capitalization of the firms listed on the Bombay Stock Exchange (BSE) tanked to Rs 178 lakh crore from Rs 185 lakh crore on Friday, last week.

The S&P Sensex fell 2037 points in intra-day deals to hit a low of 44923.08, however, the index recovered partially to end the day at 45,554 levels, down 1407 points. Nifty 50, on the other hand, ends the day at 13,328 points, down 432 points or 3.14 percent. Over the past several trading sessions, the benchmark indices have been on a winning spree, hitting record highs almost on a daily basis, due to a gush of liquidity from foreign investors.

Performance of Nifty 50 Index

Nifty %0 Index Performance
Source: Google Finance, Tavaga Research

The volatility index or the India VIX spiked around 24.5 percent to 23.19 levels. A sudden spike in the volatility index suggests a grip of bears on the markets. 473 stocks listed on the BSE hit their lower circuits during the day. The top 5 losers eroded Rs 1.95 lakh crore in wealth.

All sectoral indices at the National Stock Exchange (NSE) were in the red with Nifty PSU bank falling 4 percent, private bank by 2.2 percent, auto by 2.8 percent, and metal by 3.8 percent. Energy stocks too were down as global oil prices fell by around 3 percent as a new fast-spreading coronavirus strain shut down much of the UK.

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Reasons for the market crash today

  • Virus fear following new COVID strain: The UK government, on Saturday announced a lockdown in several parts of the country, including London. This followed after the country recorded that half of all the new COVID-19 cases had been due to a mutated, more infectious coronavirus strain.

The UK government said that the new strain is 70 percent more transmissible. Following the announcement, many countries, including India, imposed travel bans ahead of the Christmas and New Year holiday season.

Market participants are concerned that the new virus strain and consequent lockdowns and travel bans could hamper economic recovery.

  • Weak global cues: The markets were also dampened by weak cues from global peers. After trading on a tepid note for most of the session today, the selloff in the domestic markets gathered pace following sharp cuts in the European markets in the initial trading hours.

European indices slumped as the rapid spread of the new coronavirus strain led to a stringent lockdown in the UK and a travel ban from many counties.

London’s FTSE shed around 2.1 percent, Germany’s DAX around 2.3 percent, and STOXX 600, a pan-Europe index shed 2.3 percent. In Asia, Japan’s Nikkei closed 0.4 percent down and the US futures were down 0.6 percent, indicating a weak start this week for Wall Street as well.

  • Profit Booking: Since the beginning of November, domestic markets have risen over 14 percent amid massive liquidity, development on the vaccine front, and strong inflows from foreign investors.

Investors are, however, wary of taking strong positions in the markets this holiday-shortened week and as we approach the third-quarter earnings season. More importantly, lack of interest from active foreign funds is also weakening the bourses as Christmas and New Year is around the corner.

Advice for the investors

Market corrections, such as today, tend to instill fear among investors about investing. Market participants should, however, bear in mind that these kinds of corrections are commonplace and should in no way discourage them from participating in the markets. While constructing their portfolios, investors should first and foremost look to diversify their portfolios by continuing with SIPs in ETFs and Index Funds.

Our recommendation for retail investors is to opt for a pool of funds such as exchange-traded funds (ETFs) and index funds, that provide a much-needed diversification, talked about above.

Apart from SIPs, a certain percentage of investable funds should be invested every time there’s a major dip in the indices. This approach is called a staggered lumpsum approach and helps in the long term as investor benefits from a lower NAV.

For investors looking to bet on individual stocks, the most important advice for them would be to opt for well-known high quality, growth stocks.

More importantly, it is always advisable to enter stocks with a staggered lumpsum approach. Given that the markets have been trading at relatively steep valuations, a correction was certainly due and has finally arrived before the vaccine rollout.

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