MORE PAIN AHEAD
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!