By: Tavaga Research
An expectation of strong economic performance and inflation led the US Treasury yields to rise in the past few days. On top of that, the airstrikes launched by the United States in Syria further worsened the investor sentiment leading to global sell-off.
5-day performance of major stock indices in the world
|Region||Index||5-day change %|
|Hong Kong||Hang Seng||-5.43|
|India||S&P BSE Sensex||-3.52|
|New Zealand||S&P/NZX 50||-2.56|
|Europe||Stoxx Europe 600||-2.50|
Source: Factset Data; Tavaga Research
U.S. Treasury yields which rose to a 52-week high after optimistic data on GDP, jobless claims and new orders for manufactured durable goods caused the US Stock markets to fall. European stocks even saw a slight decline on Thursday and an overall decline over the week as rising bond yields offset the benefits of vaccine developments and Federal Reserve reserves assurances.
Even the Indian stock markets which had been on a rise for a long had to suffer a hit due to this global sell-off. SENSEX, which had crossed the 52,000 marks this month; fell sharply from ~51,000 to ~49,000 in a single day.
Within the equity markets, Banks and Financial services were impacted the most and fell by ~5% each. Overall, most of the indexes closed with a fall. Volatility index India VIX on the other hand reached its highest level this year indicating nervousness amongst investors.
|Broad Market Indices :|
|NIFTY NEXT 50||-2.20|
|NIFTY MIDCAP 100||-1.60|
|Sectoral Indices :|
Source: NSE, Tavaga Research
What triggered the sell-off?
The major reasons for the sell-off were:
Rise in bond yields
Owing to the expectations of a good economic expansion and inflation, US treasury yields rose. With the anticipation of Inflation, investors started selling off and betting on higher fed rates in the future.
Given the tensions around anticipated inflation and higher yields which brought down the equity valuations, stock markets tumbled as investors started selling off. Even Jerome Powell, the Fed Chairman’s remarks against inflationary pressures were not able to contain the investor’s sentiment.
Many compare this to the taper tantrum of 2013 wherein the tapering off of the bond purchases led to a Yield surge and ultimately an adverse effect on the stock markets as well.
Bond yields generally have an inverse relation with equity returns and hence a rise in the yields brings down the equity market These yields are often used as a base rate for discounting while doing equity valuations and hence we see the impact as higher yields imply heavier discounting.
The airstrikes launched in Syria on Thursday by the USA, targeting the Iranian-backed militia groups near the Iraqi border further brought down the sentiment. These airstrikes were in response to the recent rocket attack in Iraq targeted at US service members and other coalition troops. This war puzzle further dragged down the stocks.
Not just the stocks and bonds, but even currencies were impacted by these events. The Indian rupee fell almost ~ 1.42%, becoming the worst in Asia, which was followed by the South Korean Won, which was down almost ~1.39 %. Not just this, all major currencies depreciated and USD gained as investors were avoiding risks. This led to the dollar index strengthening by ~0.50 %.
How should the investors react to yesterday’s bloodbath?
Tavaga believes that these are not red flags of inflation but green flags of economic growth. Further, the GDP growth number which was released later on Friday reaffirmed our view, wherein we saw YoY growth of 0.4% in the December quarter. That means India is finally out of the technical recession!
Market corrections, such as the one that occurred yesterday, sometimes tend to instill fear about further drawdowns in response to the external factors causing the bloodbath across the globe.
However, investors must bear in mind that corrections are a part and parcel of the investment journey and such corrections must not discourage them to participate in the equity markets, instead, the investors should feel fortunate to have got an entry at attractive levels. SIPs into ETFs and index funds must continue, with additional deployment during such corrections.
Investors must also invest via a staggered lumpsum approach (apart from SIPs), that is, a portion of the investable funds must be invested only during a drawdrown. For investors looking to take direct exposure to equity markets must resort to buying high-quality growth stocks.