Money Times - - More Pain Ahead - By Laxmikant Bhole

The only cer­tain­ties in life are death, taxes and mar­ket vo­latil­ity. They don’t come at the same time or in the same mag­ni­tude ev­ery year, but they do come. I had writ­ten an ar­ti­cle ti­tled ‘Cau­tion ahead’ on 10 Septem­ber 2018 where­after the Nifty cor­rected around 1,364 points from the 11680 level to close at 10316 on 5 Oc­to­ber 2018. There was may­hem in the mar­ket on 3-5 Oc­to­ber when the Nifty lost more than 650 points in just 3 days! Some large-caps fell sharply at the panic brought about by the IL&FS debt de­fault and fear of a liq­uid­ity cri­sis in the sys­tem although the govern­ment and RBI cat­e­gor­i­cally de­nied any such pos­si­bil­i­ties. De­wan Hous­ing Fi­nance Cor­po­ra­tion fell more than 50% in one week while In­di­a­b­ulls Hous­ing Fi­nance fell more than 20%, Ba­jaj Fi­nance fell 25-30% and Ba­jaj Fin­serv fell more than 20% in one month. Blue-chips like HDFC, Hin­dus­tan Unilever, Maruti Suzuki In­dia, Eicher Mo­tors, Mahin­dra & Mahin­dra also lost sig­nif­i­cantly.

The de­pre­ci­at­ing ru­pee and the ris­ing crude oil prices are adding fuel to the fire. Also, an un­war­ranted fall of more than 50% in Yes

Bank was seen last month as the RBI de­clined Rana Kapoor’s term as CEO be­yond

March 2019. All these fac­tors cas­caded mid­caps as well and the fall was spread across the board in the last cou­ple of weeks. Read­ers may re­call, in my pre­vi­ous ar­ti­cle of

10th Septem­ber, I had fore­cast that the In­dian stock mar­ket rally is not broad based and may not sus­tain. But now I be­lieve that more pain is still to come.

The global sce­nario is not en­cour­ag­ing ei­ther. The trade war be­tween USA and

China per­sists. The North Amer­i­can Free

Trade Agree­ment (NAFTA) shap­ing up be­tween USA, Mex­ico and Canada is not in line with ex­pec­ta­tions. USA has threat­ened

In­dia over Ira­nian oil im­port and S-400 deal with Rus­sia. In spite of that, In­dia signed the deal with Rus­sia yes­ter­day. The af­ter-ef­fects of this move may be detri­men­tal for us in the short-term. Nouriel Roubini, for­mer se­nior econ­o­mist at the White House Coun­cil of Eco­nomic Ad­vi­sors and a pro­fes­sor at the

New York Univer­sity, had pre­dicted the 2008 cri­sis in USA. Also known as ‘Doc­tor Doom’, he has warned of a steep re­ces­sion hit­ting

USA by 2020.

Be­sides, the sanc­tions on Iran is re­duc­ing the sup­ply of crude, which cur­rently trades

above $85/bar­rel and head­ing to­wards the $90 mark. Thus, there are no pos­i­tive trig­gers on the global front as well. On the do­mes­tic front, the Ru­pee is con­tin­u­ously de­pre­ci­at­ing and has breached the 74 mark against the US dol­lar USD. This cou­pled with high crude oil prices is wor­ri­some for our econ­omy and in turn for our mar­kets. The govern­ment has hiked the cus­tom duty on some prod­ucts a cou­ple of weeks back in an at­tempt to curb im­ports and sup­port the ru­pee. But this move doesn’t seem to be of any help as of now. It will be in­ter­est­ing to see how the govern­ment man­ages the fis­cal deficit tar­get since it has re­it­er­ated many times that the fis­cal deficit tar­get for FY19 will be met ir­re­spec­tive of the hike in Min­i­mum Sup­port Prices (MSP), Aayush­man Bharat scheme, re­cent cut in oil ex­cise duty, etc. The govern­ment will re­view the pub­lic bor­row­ing pro­gramme and it may not bor­row much from the mar­kets this year. This has given some re­lief to the mar­kets. The RBI, in a sur­prise move on last Fri­day, kept in­ter­est rates un­changed, which could be an­other short-term re­lief for the mar­kets this week. The blood­bath wit­nessed in the last one hour of the trad­ing ses­sion on Fri­day was mainly due to mis­match of ex­pec­ta­tions.

The govern­ment re­ported a fis­cal deficit of Rs.5.9 lakh crore ($81.4 bil­lion) for April-Au­gust 2018 i.e. 94.7% of the bud­geted tar­get for FY19 com­pared to 96.1% a year ago. Net tax re­ceipts in the first five months of FY19 were Rs.3.66 lakh crore.

On the val­u­a­tion front, I strongly feel that the mar­kets are still in the over­val­ued ter­ri­tory. Cur­rently, the Nifty trades at a P/E of 24.95x and P/BV of 3.28x. Its EPS works out to Rs.413.48. Buf­fet’s in­di­ca­tor of mar­ket cap: GDP is also trad­ing higher than the av­er­age although it has cooled off from the high early this year. Over­all, though the val­u­a­tions have cooled off a bit, they are still in the danger zone and at his­toric high lev­els. Although the cues on the do­mes­tic front are neu­tral, the fear of a fi­nan­cial cri­sis in the In­dian fi­nan­cial mar­ket cou­pled with weak­en­ing ru­pee and ris­ing crude oil prices is pulling the mar­kets down. The govern­ment and the RBI need to sal­vage the sit­u­a­tion quickly or else a deeper cor­rec­tion in the mar­kets may be in the off­ing.

It seems that the pain is still not fully over and we may see more vo­latil­ity in com­ing days. How­ever, if you’re a long-term in­vestor, you need not be afraid of such cor­rec­tions and vo­latil­ity. In­vest­ing wisely at the right lev­els al­ways helps in the long run.

Here are some prin­ci­ples that in­vestors must fol­low in such painful times:

1. Don’t let emo­tions take over, in­vest wisely: Don’t panic and take hasty de­ci­sions amidst vo­latil­ity. A bad vo­latil­ity-in­duced trade can be hard to re­cover from.

2. Keep an emer­gency fund: Al­ways be pre­pared for such mar­ket con­di­tions. Main­tain a con­tin­gency fund so that you have enough money to in­vest at the right time.

3. Never in­vest at one go: Don’t in­vest all your money in one shot. Al­ways have stag­gered in­vest­ment plans.

4. Re­view your port­fo­lio: Know the value of what you own. Un­der­stand the busi­ness of the com­pa­nies you have in­vested in. Lack of knowl­edge is what causes most in­vestors to buy or sell at the worst times. Know the com­pany you in­vest in and in­vest only in fun­da­men­tally sound com­pa­nies.

5. Do not sit on the side­lines: A good fi­nan­cial plan sur­vives a shaky mar­ket. Be greedy when oth­ers are fear­ful. Con­tinue to in­vest in small chunks and in a stag­gered man­ner.

6. Di­ver­sify: Diver­si­fi­ca­tion is one of the best ways to mit­i­gate vo­latil­ity.

Be cau­tious and keep in­vest­ing!

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