Don’t use panic for reaccessing your stock value

This market had been creaking and cracking for some time now. Fragility is the key word. Nervousness everywhere. Any news and the selloff starts. And even any clarification or denial does not seem to work. Each day a few people decide that equities are not for them.

In addition to that, events like IL& FS have had a contagion impact. Even the third party sale of a rated debt paper at a discount, was enough to create panic in the share price of Dewan Housing ( DHFL). A rating agency ‘ re- affirming’ the credit standing does not seem to have done any good. It is another story that the credibility of credit rating agencies seem to hit a new low each day.

In this situation, people glance at their portfolios and can see that their portfolio may have lost much more than the indices indicate.

Many of us based our trades ( especially in the recent past) on prices rather than value. In a sense, our minds got anchored to a ‘ best case’ scenario and we were paying for high growth rather than valuation based on a long cycle of business. Everything was getting valued on bullish forecasts of P& L rather than on the Balance Sheet and business fundamentals.

The way I look at it, it is possible that the high prices we saw in the last bull run will not be breached for a few years. Thus, waiting for ‘ recovery’ in prices of some stocks we hold, could be an eternity. Now, we are seeing things with possibilities of higher interest costs, slowing economy, deteriorating macro environment.

Thus, I would evaluate things again. Look at every stock in the basket again. See if the stock price is attractive per se. And, would one buy or sell at current prices. If the answer is not a ‘ buy” it is best to sell out our positions and get on with life. Keep the liquidity for buying better bargains in good quality stocks.

One thing seems to be clear. The upside for our markets seems weak at a fundamental level. In terms of funds flow, it is only the domestic money that is propping up markets. If FII money is flowing back, probably some cheer for the market.

In this market, there are two options: i) Keep away; or ii) Buy ‘ value’ with patience.

I am not talking about high risk ‘ trading’ opportunities that are thrown up by fear and greed. Whether it is a DHFL or Yes Bank, we are treading thin ice. I have a feeling that these corporate governance issues will keep coming up with regularity. In a bull market, these are ignored ( institutional investors are bothered with price and nothing else) and in a bear market, there is a surfeit of wisdom and everyone is ‘ conservative’.

Is this going to end in a crash? Is it going to be a sideways market? Is it going to go up in a hurry? I do not have any answers. But what I can see is that many individual stock prices are melting, recovering partly or just drifting. The market paints all quality with the same brush, when in fear or greed. So, it is also happening that some good stocks are also hammered in this panic. I look at DHFL as a case in question. The apparent reason has nothing to do with the company. So, if the story is still the same, it is a buying opportunity. In case of something like Yes Bank, there is a regulatory issue. In case of Bandhan Bank, there is an issue of regulatory compliance. Same is probably the case with Kotak Bank. How many of these stories will impact future performance? That is the call one has to take.

Keeping your eyes open is a good thing. Take the stocks you like or always wanted to own. See the historical ‘ bands’ they have traded in. “Bands” could be the range of the P/ E or the Price/ Book Value. Buy what you wanted to when the price is close to the lower end of the historical range. If the company is a non- cyclical, consumer spend driven business, you would probably wait a year or two. You could have a longer wait if it is a commodity business. In India, the commodity cycle got a new lease due to environmental problems in China. That and some protectionist moves from various governments. They are not sustainable profit drivers and any assumptions based on governmental actions would not hold valid over time. Government regimes and regulations are capricious. Buying stocks in panic is like a patient hunt. You have to wait for your prey.

( The writer is a veteran investment adviser. He can be contacted at balakrishnanr@ gmail. com)