While the markets may have tanked nearly 3 per cent in a single session, brokers and fund managers are advising investors to keep calm and carry on. The consensus seems to be that Wednesday’s correction was just a bump in the road in the ongoing equity bull run.

Overweight burden

Pradeep Gokhale, Senior Fund Manager, Tata Mutual Fund, said given the stupendous run-up in the markets since last August, a certain amount correction is to be expected. “Also,” he adds, “India’s relative valuation vis-à-vis other emerging markets is expensive. India has both higher growth and return ratios compared to other emerging markets, and as a result, commanded a premium. But that premium expanded significantly in the rally. Now, money is being shifted to the cheaper markets in Brazil, China and Russia as India has become overweight in FIIs’ emerging market portfolio.”

However, Gokhale believes that consolidation is good for the long term, since all corrections till now have been shallow. If the markets had continued up at breakneck speed, he said, “valuations would have been extremely stretched”.

Ahead of recovery

While conceding that the equity markets have, until now, raced ahead of the economy’s recovery, analysts say policy changes are catching up. Gokhale said, “There has been a mismatch of expectations, but policy action is happening as well. The Coal Bill has passed, the Mining Bill too, and only Land Acquisition Bill remains pending.

For now, growth will have to be pushed by capex from the government, and corporate earnings will pick up eventually. Private capex will catch up as banks start cutting base rates.”

Vaibhav Agrawal, Vice-President – Research, Angel Broking, expects the RBI to lower interest rates even further. A 150-basis point cut is required, he says. “The monsoon is just a seasonal bump we need to cross.”

Sound fundamentals

Agrawal expects equities to pick up where it left off very soon after the correction, since “nothing has changed fundamentally.” He, however, believes India will continue to see much money pouring in from foreign investors.

“The total amount of quantitative easing in calendar year 2015 by the US, UK, European Union and Japan will be around $1.1 trillion, while it was only $268 billion last year and $600 billion in 2013.

All this excess liquidity means FIIs will continue to invest in Indian equity,” Agrawal said.

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