WHAT MUST ONE DO WITH MARKETS FALLING?

Last one month was depressing for the investors. The market behaved like there was no future as stock prices fell heavily, with many stocks losing as much as 30% in a month. In the last few months, Investors bought at every fall, thinking it is a good time to invest, but share prices fell further, thereby creating self-doubt. This kind of rapid fall does not happen so often. With gloomy news engulfing all the markets – be it domestic or international – it is becoming difficult to come up with convincing reasons to buy in the market.

Post Budget Rally Belied

When the July month began, there was a big hope that it would prove to be a good month for the investors. There were a couple of reasons for the same.

• First, this time we did not see any pre-budget rally. Hence, the belief was that with the strong mandate given by the people to the Modi government, the budget would be bold and reformist, thereby pushing investors’ sentiments higher. Hence, the market was expecting a post-budget rally.
• The second reason for the market to be good is that historically the month of July has given positive returns to the investors. The Sensex has given positive returns ranging from 1.20% to 6.16% every year in the month of July over the last few years.

But both these hypotheses have gone kaput. The budget failed to live up to the market’s expectations. The most irritating thing in the budget seems to be the tax on the super-rich. In the process, FPIs having the structure of trusts also came under the ambit of the super-rich tax (but not those FPIs having corporate structure). FPIs sold heavily in the month of July, leading to an outflow of Rs 12,419 crore. In fact, before the budget, the FPIs were net buyers almost every month in 2019. This shows how badly the FPIs was disappointed with the budget. Year-to-date, the FPIs are still net buyers to the tune of Rs 63,596 crore.

Due to heavy selling by the FPIs, India’s overall market cap fell from Rs 1.52 lac crore (June) to Rs 1.41 lac crore (July) – a fall of 7.34%! The fall in small-caps was more severe with the BSE Smallcap index falling as much as 11% in one month.

June Quarter Numbers Did Not Help Either

At the same time, corporate India’s results were also a mixed bag that did not provide any major clue that one could take relief from. The sentiment is so poor that if a company declares results as per market expectations, it would fall by 2-3%.

But if a company declared poor results, it would fall by 15-20%. In either case, the trajectory is downward. Of the 69 large-cap companies (having a market cap above Rs 20,000 crore), as many as 49 companies are quoting below the prices on the results day. With concerns on earnings growth, many projections are being revised downward. All hopes are now pinned on the second half of FY20 as many people believe that the demand should revive, including the auto sector.

But There Are Positives Too

But despite so much gloom, there are few positive factors investors must take note of.

• First, there is a slowdown in the demand and not degrowth. Which means the growth rate has come down, but India Inc.’s volume growth is still positive. We are not in a recession.
• The IMF scaled down India’s GDP growth rate from 7.3% to 7%. This is still higher than most of the other leading economies in the world. Companies like Asian Paints and Marico reported smarter volume growth, suggesting that the slowdown has been blown out of proportion by a few bear operators to create panic in the market. The strong performances of Reliance Retail as well as Avenue Supermarts (D’Mart) clearly show that people have not stopped buying products.
• The recent report from Cushman and Wakefield shows that the gross leasing of office space doubled to 18.7 million square feet in the first quarter of the current financial year from 9.28 million square feet of the same period last year.

Somewhere, the market should take heart from these data points too. Right now, the monthly auto numbers have become a barometer of the state of the Indian economy. That’s hurting the sentiment to a great extent. Despite challenging macros, India Inc. has posted overall net profit growth of almost 6% (excluding telecom companies). So, on the one hand, the profits are growing (albeit at a slower pace) and, on the other hand, market caps are falling, thereby making many stocks attractive from a valuation point of view. My stock market experience suggests that the market cannot ignore fundamental factors for too long.

• Another positive factor is that the monsoon is picking up. The recent IMD prediction is that the monsoon would be normal in August and September as the fear of El-Nino is receding. This should revive the demand from rural India, thereby spurring economic activities.
• India has always faced problems as and when the crude oil prices have moved up. But in the last four months, the crude oil price trend has been downward. India’s average crude oil basket price was $71 per barrel on April 2019 and it has steadily come down to $62.39 in June 2019. So, more than 10% fall in crude oil prices would provide great comfort for the Indian economy.
• Another big factor that many are ignoring is the RBI’s constant rate cuts. Normally, it takes 6-8 months to transmit the cut to the consumer. The first-rate cut happened in February, and hence, by Diwali one should see the major transmission of rate cuts to the retail level. As and when that happens, there would be a lesser burden on India Inc to service the debt.

So What Should One Do?

The most obvious question everyone is pondering now – should we buy in this market or should we sell, as the portfolio is going down every day?
My answer is firm: Buy! I know I am going contra on the market. If you sell in this market, you would surely repent your decision six months down the line. Right now, fear has taken over logical thinking. This is where I will borrow the famous quote of Warren Buffett who had said, “Be fearful when others are greedy, and greedy when others are fearful.” This is the right time to construct the portfolio. If you can do this, you will profit handsomely when optimism would have replaced fear.

Having said that, there is a fair possibility that the market could slide further from this level. But remember, no one can buy at the bottom. Hence, don’t worry if the value of your portfolio goes down in the interim. Your objective is to create a winning portfolio over the long term.

However, if for some reason, you are weak-hearted and do not have the courage to put your money in this market, I would sincerely advise you to stop tracking the market for some time. Take a break. Else, out of fear, you could get into some irrational trades by selling good quality companies. I repeat – the current share prices are not good levels to sell unless you are holding poor quality companies.

The way we have seen a quick fall, my assumption is that the bounce-back would be equally quick. I am convinced that we are close to the bottom and hence time to buy.

- Nilesh S. Bajaj
Cedrus Consultants Pvt. Ltd.

Cedrus Wealth Partners
Pune, Maharashtra.
www.cedruswealth.com