For an equity investor, stock markets lived by the definition of volatility in 2018. To a layman, stock markets mean the indices. However, it must be noted that not all stocks are covered in indices. Stocks that are not part of the indices may or may not mirror its performance.
Market volatility also proved decisive for some investors. Markets replicate investor sentiments. Therefore, a more in-depth look into one-year trends of the indices reveals clues on how a rally, slump, underperformance, and outperformance is perceived.
In this piece, let’s understand how one-year equity trends is a gateway to market sentiments:
Most parts of the current financial year saw these stocks in the red. The one-year trend of Nifty Midcap 100 and Nifty Smallcap 100 showed a decline of 18.89% and 32.63% respectively. Similarly, the BSE mid-cap and BSE small-cap index fell by 16.55% and 27.77% respectively. Starting from February 2018, when the markets witnessed their worst fall since November 11, 2016.
The imposition of long-term capital gains tax and dividend tax on mutual funds and the introduction of stricter tax rules on stock investments unnerved the investors. Heavy sell-off was witnessed as many investors dumped the mid-caps and the small-caps, as a part of their risk-averse strategy. Further, the situation aggreviated after the highest number of mid-term auditor resignation, in the last 6 years, that occurred in June 2018. This was done to in order to weed-out risky clients, due to regulatory fear.
Therefore, the overall market conditions 2018 indicate that the investors remained risk-averse and preferred investing in established businesses.
Related read: Finding Value in Midcap Stocks
The Nifty 50 rose by more than 3% over a year. Large-caps were clear winners in 2018, as many investors preferred them over mid-caps and small-caps. Large-cap companies are established businesses. During volatility, risk-averse investors consider them over new and growing businesses. Therefore, a large-cap rally indicates growing investor confidence for big companies.
Nifty Finance saw a rise of more than 8% in the last year. Nifty Bank and BSE Bankex also rose more than 5% each over the previous year. However, this could be more or less due to market volatility, and defensive buying during that period. Investors become cautious when shifting their attention from equities to fixed income securities. The growth in Nifty Finances shows that the IL&FS led liquidity crisis of NBFCs barely affected investor sentiments.
In 2018, markets fell with the falling rupee. However, the rupee depreciation proved to be good for the IT sector. The stocks of IT companies, thus, rose. Even in 2019, under stable currency conditions, IT companies are leading to robust gains in the benchmark indices. If you look at the one-year data for Nifty IT and BSE IT, you will see that it outperformed the benchmark indices. This indicates that investors are expecting the rupee to be stable or even decline. This can be interpreted as a signal towards good long-term returns.
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