It has been the worst week for Indian stock markets in the last 4 years. The Sensex lost ground on all days except on Thursday where it saw some recovery. Take a look at the immense volatility and the ground that the Sensex lost:
Monday - Loss 0.41%
Tuesday - Loss 2.23%
Wednesday - Loss 0.95%
Thursday - Gain 1.22%
Friday - Loss 2.28%
What were the real worries?
To begin with the biggest worry was the fear of the US Federal Reserve hiking interest rates at its policy meet of Sept 16-17. It would be the first hike by the US Fed on interest rates in the US in 9 years. Fears of an interest rate hike has led Foreign Portfolio Investor (FPIs) who have been constantly selling in the Indian markets.
The reason for raising interest rates by the US Federal Reserve is because employment has been growing and the economy is on a much better footing, though it remains concerned about inflation being much lower than its target of 2%.
Now, if interest rates in the US rise, FPIs would move money from shares to government securities in the US. But, the fear of investors maybe a little over exaggerated. Even if the US Fed increases interest rates by 25 basis points or 0.25%, it is not as if it becomes a solid deal.
One must remember that growth in the US is gradual and hence it may end-up only increasing rates by a maximum of 0.50 per cent in the next one year.
Is there more pain left?
The Nifty might end up falling another 200-400 points or so. If that happens it could be nearer the 7300 levels. A few analyst expect the Nifty earnings to be around 450 for 2015-16. If we assume that the Nifty manages to remain near the 7300 levels it would discount the 2015-16 earnings by 16.67 times. This makes the Nifty price to earnings multiple, much below the average p/e multiples of the past. Hence, if the Nifty falls below these levels it could be a great buying opportunity.
Also, wait for the dust to settle before buying.