Macro worries & market
The market of late shows signs of worries and nervousness on account of the rising crude oil prices, weakening rupee, rising interest rate and inflation, broadening of the fiscal and current account deficit (CAD) and of course the political drama witnessed every day. The broader markets are volatile with a downward bias. Barring a few stocks that have kept the benchmark flags flying, most stocks have distanced themselves from their respective 52-week highs and are proceeding towards the median.
Is the macro situation so bad that it warrants such nervousness? Is the NaMo rally at Dalal Street, which started in September 2013 reaching its conclusion? The journey of the Sensex that started from around 19000 has seemingly completed its full circle at 38000 in about five years now and fatigue seems to have set in thanks to the macro worries. It is then worthwhile to examine what big investors think and what strategies they adopt. This may answer a lot of the many posers and help small investors from falling into craters. “Indian equities have run well ahead of fundamentals,” says a Credit Suisse report. According to the global financial services major, the valuations of Indian equities have stretched further largely driven by financialisation of savings, improving corporate earnings outlook especially post GST and India's relative resilience to a trade war with USA. "While we remain positive about the strength in corporate earnings, we believe that the overall market has run well ahead of fundamentals. We expect selling pressure to set in and advise investors to book profit in Indian equities," Credit Suisse said in a research note.
The Indian equity market is the only major market to have seen an expansion in price/earnings (P/E) ratio compared to all other peers (including USA), which experienced contraction in this aspect. Given the higher interest rate, GST collections running below expectations, rising crude oil prices, weakening rupee and fiscal and current account deficit concerns, the Indian markets may suffer some de-rating in the near-term. The moderating domestic flows into mutual funds, which have been the driving force so far, indicate a creeping nervousness and if this persists, the downward journey will gather speed. Global brokerage major Goldman Sachs cites elevated valuations, a potential slowdown in economic growth and the upcoming elections as major risks and feels that the Indian stock market run is over. The firm has been bullish on Indian stocks since 2014 and the market has nearly doubled since then returning over twice that of global equities. “The risk:reward for Indian equities is less favourable,” said its report dated 16 September 2018. “The key reasons for our low optimism include stretched valuations, multiple macro headwinds in the near-term and the election event risk,” it added.
Keeping these factors in mind, retail investors need to strategize their investment moves. However, the advice of booking profits is easier said than done. Booking profits at a time when stocks are 20-40% below their yearly/recent highs is a difficult call to take. Retail investors are humans and attached to their stocks, the purchase price and the notional gains they’ve seen. It is easier for Mutual Funds and inanimate investors, where the emotional quotient is low or nearly absent, to book profits or exit from a stock. It is difficult for small retail investors to do so and they will have to
develop nerves of steel to absorb such crushes. Lessons in discipline in investments and adhering to bitter decisions look so easy within the book but outside in the real world, it is a different ball game. However, not all are pessimistic. Morgan Stanley analysts have raised their September 2019 target for the Sensex to 42000, citing broad-based earnings growth. They advised investors to hunt for underperformers rather than buy into stocks that have beaten the market.
Well, tough days call for tougher calls. Some may use the ongoing correction to off-load their positions while some may use it as an opportunity to enter. Some may be right momentarily while some may be right in the long run. Since emotions rule the investment world, it is rightly said in Gujarati, ‘Ooncho nicho bhav ni safar nathi, Bhaavna ni safar che’.