The knockdown continues!
September 2018 left the markets stranded in a whirlpool of macro headwinds. The sharp sell-off sparked by macro concerns around liquidity and solvency of major NBFC players dominated the scene. The volatility witnessed in the markets last month barely matched the sweet tune of ‘Come September’ but instead reminded us of Green Day’s title song ‘Wake me up when September ends’. The deadly macro headwinds of rising crude oil prices, weakening Rupee, tightening liquidity, IL&FS debt default and rising interest rates sparked one of the most painful market corrections in many months.
After rising 3% in August and 6% in July, the Nifty lost 6% in September and the losses beyond the Nifty Fifty are much higher. FIIs remained constant sellers having sold over $24 billion in 2018 so far. Mid-caps resumed underperformance in September after outperforming large-caps in August. In September, mid-caps lost nearly 14%, underscoring the high market volatility and a near panic.
India remained amongst the worst performers in September losing nearly 6% whereas most other markets gained. The key global markets that closed higher in local currency terms in September were: Japan +5%, Russia +5%, China +4%, Brazil +3%, U.K. +1% and Korea +1%. Notably, the MSCI India index has outperformed the MSCI Emerging Markets (MSCIEM) index by 119% over the last five years. MSCI India’s P/E is at a premium of 74% to MSCIEM’s P/E (above its historical average premium of 45%).
Sectoral trends during September 2018 deserve a closer look as they reflect the pain in the economy. Real Estate (-20%), PSU Banks (-19%), Media (-15%), Auto (-13%) and NBFCs (-11%) featured among the top losers in the month. Yes Bank (-47%), Indiabulls Housing Finance (-32%), Bajaj Finance (-24%), Maruti Suzuki India (-19%) and Tata Motors (-16%) were the top laggards. Technology was the only sector that was positive at +1%. Wipro (+70%), Tata Consultancy Services (+5%), HCL Technologies (+4%), Bharat Petroleum Corporation (+3%), Vedanta (+2%) were the top performers in September on a monthly basis.
What does this sharp correction offer? This is the moot question now. Even after a sharp fall in September, India stands out in calendar 2018 outperforming other emerging markets (EMs) notwithstanding the litany of concerns. However, this has happened so far without any tangible or meaningful rebound in earnings even as expectations of earnings revival stay lofty. This has indeed expanded valuation premium v/s both historical averages and EM peers. Elevated bond earnings yield spread is not helping either. The Nifty trades at 20x FY19E EPS-off from the recent highs but still rich!
Hence, a prudent strategy in such a scenario may be the oft-time tested-adage‘. When the going gets tough, the tough get going’. Large-caps will be preferred despite their premium over mid-caps. This is to counter an environment of challenging macros, potential slowdown in domestic equity flows and the forthcoming busy political calendar. This is the time to look back at defensive sectors such as pharma, consumption and automobile. Private banks, however, are still insulated to the currently liquidity quakes but this may not last.
Even at a continued knockdown stage, we find solace in large-caps as they are insulated from great panics. Don’t let the market knockdown or knock out prudent investors.