Equity Market & Liquidity: Tales of Woe
Guest Column: Shachindra Nath, Executive CMD, Ugro Capital

On Wednesday, the benchmark Dow Jones Industrial Average fell by over 800 points in its worst ever drop since February triggered by a rout in frontline technology stocks. While the jury is still out on what drove the Wall Street to record lows, a consensus view that is emerging amid the growing uncertainty is that it is the hardening interest rates in the US, escalating trade tensions and boiling oil prices together that have turned the tide against equities at a global scale.

Back home, the theme that has been playing out in the equity market is sell, sell and sell mirroring the growing woes of global markets. The jitters in the US market have ripped through the Indian market on Thursday with the benchmark index – the 30-share S&P BSE Sensex tanking by another 759.74 points or as much as 2.19 per cent to close at 34,001.15, dashing all the hopes of any recovery. Similarly, the renewed wave of sell off shaved off 225.45 points or 2.16 per cent from the broader barometer Nifty 50 to close trading at 10,234.65

Nullified actions

The broad based sell off in the domestic equity market has nullified whatever actions that the government, the RBI and other institutions have been taking to steady the sinking market. Interestingly, the current spate of sell-offs came on the back of RBI’s decision to open the liquidity tap for NBFCs, with state-owned lender SBI and the National Housing Bank (NHB), in toe, by buying (or in the case of the NHB, refinancing) loans from NBFCs and HFCs. This concerted move to pump in liquidity into the system did not brighten sentiments as the domestic markets seem to be taking cues from their global peers, more specifically from Wall Street.

This volatility in the equity market has been the most prominent in the financial sector in India, specifically among NBFC and Housing Finance stocks. Most investors take their cue from equity markets; given the high exposure of the mutual fund industry to the NBFC segment, there is increasing risk aversion among investors, which in turn has resulted in pressure on fund managers to either reduce their exposure to the NBFC and HFC segments or at least not provide further liquidity to these segments.

The NBFC and HFC sector has thus entered a vicious cycle – the fears of a liquidity crisis in these companies has resulted in a sell off, which in turn has resulted in liquidity providers turning the taps off on further liquidity.

Both, the broader markets, which continue to be weak because of global factors, and the NBFC and HFC segments, which are reeling under the effects of the perceived liquidity crisis require investors to tread a cautious path. At times, every correction in the market or hardening of yields looks very attractive, and seems to be the right time to invest – however, unless you are a seasoned investor who can make a qualified decision capable of drowning out the noise in the markets, it is advisable to trade with caution – losing some upside is better than losing your principal in this market.

However, if you are holding an investment, it is advisable to wait. If you are holding an investment in a mutual fund, then you can discuss this with your advisor and draw comfort on their portfolio before you take a hasty decision to redeem. Remember, a decision to exit, driven by fear will increase the pain for the broader market. The sage advice, therefore, is to tread with extremely caution in a volatile market with no support in sight till global markets steadies.