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Sensex Crash

Vital factors: Why SENSEX crashed and lost huge points? What should you do?

Will : legal declaration of how a person wish his/her possession to be disposed after their death

Return : Profit or loss derived from an investment

Investor : An investor is any party that makes an investment.

Warren Buffet : Buffett is a value investor. His company Berkshire Hathaway is basically a holding company for his investments. Major holdings he has had at some point include Coca-Cola, American Express and Gillette. Critics predicted an end to his success when his conservative investing style meant missing out on the dotcom bull market. Of course, he had the last laugh after the dotcom crash because, once again, Buffett's time tested strategy proved successful.

It’s the average of several of stocks in the market. It represents the market as a whole or as a part of the market.

Bombay Stock Exchange Sensitivity Index or SENSEX is the weighted benchmark index of 30 largest and most actively traded stocks on Bombay Stock Exchange.

When a government’s expenses are greater than the revenue, it is known as fiscal deficit.

Gross Domestic Product is the value of all finished goods and service inside a country in a specific period of time in monetary terms.

Why SENSEX has crashed and lost huge points?

SENSEX has been falling from the peak for the last few months. It has dropped around 4000 points. Investors are scared of this economic pressure. The Indian government, economist, and financial experts are trying their best to calm the investors.

But, what is the root cause of this correction?

There are four major elements that have contributed to this market correction.

1. Fall of Rupee value against Dollar
2. The rise in Crude oil price
3. Rising bond yields and
4. Withdrawal of foreign investment

Fall of Rupee value:

The rupee falling against Dollar is not a new thing, but it hits the record low. Rupee collapsed 13% against the dollar. Dollar value hits Rs. 75 on 10.10.2018 (Wednesday). It is the worst loss in the last 16 years. Not only Rupee, but most of the Asian currencies have lost its value this month. The price rise of crude oil, the shortage of exporting of gold and oil, and the increase of the bond interest are the major causes of the rupee plunge.
 
Oil Price:

For the last Four years, the price of crude oil has increased from 40 to 75 dollars per barrel. India is the world’s third-biggest oil importer. So, no wonder the price increase of crude oil hitting the Indian economy. It is one of the reasons for foreign investors to dump their shares. It is the impact of the trade war between the US and China. If the situation continues, the price of crude oil may increase up to 90 dollars per barrel in a few months.
 
Bond yield:

To make the economic pressure worst, RBI raised the yield on the 10-year government bond to 8.22%. According to economists and financial analyst, it added fuel to the problems, and it only increases the count of the financial obstacles.

Foreign Investors:

To make the situation worse, the foreign investors have been selling their shares. They sold their shares worth net of Rs. 17,600 crores in October, in September they sold stocks worth net of Rs. 9, 600 crores. Last year overall foreign investment is Rs. 2 lac crores. Foreign investors are not scared of the price increase of crude oil and fall of rupee value. US bond yields raised. They wanted to make use of that and invested in them. So, they withdrew their Indian stocks. So, there is no wonder it affects the SENSEX.
 
Other Factors:

The financial experts and economists think, increasing bond yield and other decisions are not enough to calm the investors. Instead of that, it only increases the reasons for economic problems. The retreat of importing Crude from Iraq has been one of the causes of economic dilemmas.
 
What should you do?

Whether the investor or the expert “what should I do” is the question bugging them. Economist and the government have been trying to control the economic problem. Apart from India, most of the other Asian countries have the same situation. BSE, Nifty, Dow Jones, S&P 500 also heavily lost their stock index points in these few days. There is no point to panic. It won’t make everything better. Doing nothing prevents from making things even worse.

Are these (above-discussed) 4 factors, something new to the stock market?

Haven’t market faced these factors earlier?

Haven’t market performed in the past regardless of these factors?

Let us check the fundamentals.
 
Indian Economy: Strong fundamentals, improving growth outlook

Improving macros FY 13 FY 14 FY 15 FY 16 FY 17 FY 18 FY 19E
GDP at market price (% YoY) 5.5 6.4 7.5 8 7.1 6.7 7.5
Centre’s fiscal deficit (%GDP) 4.8 4.4 4.1 3.9 3.7 3.5 3.5
  • GST is stabilising. The impact of GST and demonetisation on growth is now behind.
  • Capacity utilisation is improving.
  • GDP is growing at a much higher rate compared to 5 years back. The fiscal deficit is lesser and under control.

Therefore, corporate India is expected to grow. That will eventually reflect in the stock index.
 
One more worry, you might have is the upcoming elections.

Elections and equity returns Spot the pattern*!

Year Ending BSE S&P Sensex 1-year absolute returns
Mar-79 100
Mar-80  129  29
Mar-81  173  35
Mar-82  218  26
Mar-83  212  -3
Mar-84  245  16
Mar-85  354  44
Mar-86  574  62
Mar-87  510  -11
Mar-88  398  -22
Mar-89  714  79
Mar-90  781  9
Mar-91  1168  50
Mar-92  4285  267
Mar-93  2281  -47
Mar-94  3779  66
Mar-95  3261  -14
Mar-96  3367  3
Mar-97  3361  0
Mar-98  3893  16
Mar-99  3740  -4
Mar-00  5001  34
Mar-01  3604  -28
Mar-02  3469  -4
Mar-03  3049  -12
Mar-04  5591  83
Mar-05  6493  16
Mar-06  11280  74
Mar-07  13072  16
Mar-08  15644  20
Mar-09  9709  -38
Mar-10  17528  81
Mar-11  19445  11
Mar-12  17404  -10
Mar-13  18836  8
Mar-14  22386  19
Mar-15  27957  25
Mar-16  25342  -9
Mar-17  29621  17
Mar-18  32969 11

* Represents year of elections

Source: Sensex: www.bseindia.com, Election Commission of India for election years, Returns computation internal

*As can be noticed there is no pattern in Sensex returns during the year in which elections were held or in years before or after the elections

 

What should you REALLY do?

“People make bad choices all the time, usually because of fundamental inability to operate over long time frames.” – Charlie Munger

1. Long-term returns matters to us and not each year return. We can’t do anything with market volatility or irregularity. This is how the market works.

“Gains won’t come in a smooth or uninterrupted manner; they never have.” – Warren Buffet

 

2. Continue your SIP and STP. As the market is available at a discount, it is better to continue our investments. Continuation of SIPs / STPs will help you average out. You will be able to recover from your losses sooner.

“The tendency of people to run when the situation is bad and go in only when it’s good is a good formula for losing money.” – Peter Lynch

 

3. In this last 10 years, there are many negative events in the stock market, economy, commodity prices, politics, terrorism, natural calamities…Regardless of all these negative events, the stock market has deliver long-term returns. Negative events make temporary headlines. By acting based on that, don’t redeem your investment and make permanent lose. Please avoid noise.

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