Wednesday, February 7, 2018

What to do?

"There are two ways of spreading light: to be the candle or the mirror that reflects it."
—Edith Wharton (American, 1862-1937)
Word for the day
Cerebrate (v)
To use the mind; think or think about.
Malice towards none
Tension with neighbors is just another indicator of complete Congressization of BJP.
In Indira days "external threat" used to be the common refrain to garner support.
First random thought this morning
The current winter season has been unusually dry. In most part of the country drought like conditions exist. A recent road trip across UP and MP suggests that most of the smaller rivers have dried up and larger rivers' water level is much lower than normal.
The weather is unusually warm and wheat crop is ripening early. The yield is expected to be low despite higher acreage.
In hills summer flowers are blooming in peal winters, which as per folklores mean that the monsoon may be below par.
All this does not augur too well for Indian agri sector.


What to do?

In past two days a number readers have been asking about my vies about the market.  "Should I sell now or wait for a bounce back?" is the common refrain. Only 3 readers have so far asked me whether they should be putting fresh money in the market.
I am in no position to offer any specific advice to anyone. However, for the benefit of all readers, I may share my personal views as follows:
(a)   Most indicators are suggesting that the extant bull market ended months ago. We witnessed a strong bear market rally in past few months, just like the one we witnessed in July 2007-Janaury 2008 period when despite sub-prime defaults the benchmark indices gained ~50% and broader markets outperformed.
       This time from end September 2017 and till mid January , we have seen broader market indices rising 24-30% despite macro environment worsening, and valuations transgressing into bubble territory.
(b)   For the entire bull market that started from end August 2013, the broader market indices are still outperforming Nifty by ~40% (midcap) and ~55% (small cap).
As is the case always, this outperformance may be corrected over the course of next many months. Given that the distance to be covered is still very long, the journey is going to be very painful, exhausting and to a large extent frustrating. I therefore continue to maintain an all large cap portfolio.



(c)    In my view, the market correction has just started and has a long distance to cover over next one year or so. We may see intermittent up moves, but the market shall eventually head down.
In strict technical sense, in my view, the following scenario is likely over next one year:
            Base case for 2018
Nifty should bottom around 8470 in next 12months, i.e., a 50% correction of the rally from 6825, the low of March 2016.
            Probable scenario for 2018
Nifty may correct 38 to 50% of the up move (5285 to 10114) in next 13months. Which means, the downmove may bottom between 8280-7700 Nifty level by January 2019.
            Worst case scenario
The worst case scenario could be that Nifty corrects the entire gains made since March 2016 low of 6825.
(d)   Since almost everyone is looking to sell at rallies, the rallies form here may be small, and in many cases only intraday.
(e)    Rising rates, inflation and tighter liquidity are a totally foreign to a significant majority of investors who entered market in past decade or so.
The humongous losses on bond portfolios, when crypto bubble is bursting and economic growth is peaking at much lower level than widely anticipated, are most likely to entail a knee jerk reaction from inexperienced, over confident and overleveraged investors.
Brexit will add more uncertainty to the global markets this summer, as it would also be an unprecedented situation, with potential to cause a spiral effect across Europe.
(f)    Back home, prospects of a below par monsoon, specter of political instability, less than expected earnings growth, and tighter liquidity shall keep equities under pressure.
In view of all this, I am certainly little extra cautious on my equity portfolio.
However, as an investor I certainly do not believe in a binary type situation (i.e., raising 100% cash). I am though holding reasonable amount of tactical cash, that should enable me to pass through these difficult time and give me an opportunity to add few extra bps to my returns.
To sum up, my strategy is very defensive portfolio, reasonable amount of cash, low return expectations, no contra calls and no fishing (bottom or otherwise).
If you feel that I have not answered the question "sell now or wait for bounce" categorically; well I have not and I cannot!

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