Some food for thought
"There are two ways of spreading light: to be the candle or
the mirror that reflects it. "
—Edith Wharton (American Author, 1862-1937)
Word for the day
Buzzwig (n)
A person of consequence.
First thought this morning
The legendary investor Charlie Munger apparently finds India a less
attractive investment destination. He would rather work with a bunch of Chinese
rather than Indian.
As per a tweet by some Bill Brewster (@BillBreweterSCG), Charlie
said in an interview, "Indian civilization mired down (in) cas(t)e system,
over-population (has) assimilated the worst stupidities of the democratic
system". He claimed, "it is hard to get anything in India. The bribes
are just awful."
Charlie conceded that "India will move ahead", but
added a rider "But it is too defective as a get-ahead...the Indians I know
are fabulous people. They are just as talented as the Chinese, I am speaking
about the Indian populace. But the system and the poverty and the corruption
and the crazy democratic thing where you let anybody who screams stop all progress."
Commenting on Indian democracy Charlie lamented, India is
grossly defective because they've taken the worst aspects of our culture,
allowing a whole bunch of idiots to scream and stop everything. And they copied
it! And so they have taken the worst aspect of democracy and they forged their
own chains and put them on themselves. And so no I do not like the prospects of
India compared to the prospects of...."
Given that Charlie has said similar things earlier also, I am
inclined to take this interview attributed to him as true. Admittedly, though
true, this does hurt the personal pride and ego. Few in India may have guts to
reject his remark purely on merit. Alas!
But after reading this Charlie loses all the respect I may have
for him (not that anyone gives a damn about this) as an investor. A person who
could see a Nation separate from its populace cannot be a good investor per
se. It's like seeing a company separate from its employees. Charlie may be
the lucky person who was at the right place when the times were most opportune.
Yesterday I gave away hard cover Poor Charlie's Almanac
that has been my prized possession since past 15years, to Kabadi for Rs9 (1.5
kg @Rs6 per kg), added Rs1 and bought 2 Parle G packets for stray dogs. Feeling
light.
Chart of Day
Fathoming the worst case scenario
For past few weeks, I am getting lot of queries from readers,
which could be summarize in just one question, "How much more stock prices
could fall from here?"
People want to know this to make a decision as to whether they
should be buying more stocks or sell their existing holdings and protect their
capital and/or profits.
I am obviously not the right person to answer this complex
question. In my view, this question could be answered confidently either by an
astrologer or by an "expert" who has mastered the art of investing.
Nonetheless, since I have been asked, I find obliged to provide
some data points that may help readers assimilating the current state of
markets, within a market cycle. In my view, these data points may be at least
used to assess the worst case scenario.
It is critically important to note that in no way I am
suggesting that the worst case scenario is likely to occur.
Assuming that the current market cycle started from 1st March 2016,
after Nifty made a closing low of 6987 on the budget day 29 February 2016. As
of last weekend, Nifty was higher by ~56% from the base line, giving a return
of ~16% CAGR.
It may be pertinent to note that in these three years—
- The economic growth rate has slowed down from 8% in FY16 to 6.7% in FY18 and 7.2% FY19e.
- Brent crude, a critical macro variable for Indian economy, has risen @20% CAGR.
- INR has weakened vs USD @1.4% CAGR.
- The interest rates have fallen, with 10yr benchmark yield falling to 7.31% from 7.78%.
- The Nifty EPS has grown @9.8% CAGR during FY16 to FY19e.
- Domestic institutions have invested over Rs2trn in Indian equity markets.
- Foreign institutional investors have also invested Rs505bn in Indian equities in this period.
- The NSE market cap has increased by Rs54.73trn in this period, consequent to massive re rating of the valuation of Indian equities, for no apparent reason.
- US S&P500 has gained @11.7% CAGR in this period, with US companies recording record profit growth.
Current state of the "market cycle"
After peaking on 28 August 2018 at 11738 (closing basis) Nifty
has corrected just 8.4%, and is still higher by ~56% from the base point.
In strict technical sense, a bear market in Nifty does not begin
till it closes below 9390, i.e., 20% lower from the peak.
This is also very close to 9362 level that would mark 50%
retracement of the gains from 6987 (29 February 2016) to 11738 (28 August
2018).
Thus, from a strict technical viewpoint another ~13% correction
to 9390 from the last Friday closing of 10750, should be considered normal,
without actually resulting in beginning of bear market. Nothing to worry in
this.
However, this data could be appreciated by the Nifty traders
whose investment horizon expands from 30seconds on lower side to one Nifty
F&O cycle on the higher side.
What about the people who have invested their hard earned money
in equities believing the experts and the Government?
Now consider the following facts:
(a) Tough Nifty is still 56% higher from the baseline,
more than one third stocks are trading at the price lower than the baseline
price. Even for NSE500, 24% stocks are trading at a price lower than their
price on the baseline.
(b) Most of the gains in market may have been
resulted from a few private sector banks, as Bank Nifty is the only benchmark
Index that has materially outperformed Nifty. Most other benchmark indices have
performed in line with Nifty, except Nifty Small Cap which is a gross
underperformer. Mid and Small caps are the stocks where most small investors
are stuck.
Given that most mutual funds are naturally holding 25-40% of
their holdings in financials, mostly a few private sector banks and large
NBFCs. Any redemption pressure there could bring the performance of financials
in line with the benchmark Nifty.
(c) Sectorwise, besides Financials, Energy
(mostly Reliance) Realty and Metals have outperformed majorly. Metals for sure
are facing threat from a global demand slowdown. A 20-25% correction in the
sector should not be surprising. Auto, Media and Pharma have been the worst
performing sectors in these three years. As of this morning, things are not
looking great for any of these sectors.
(d) To get an idea how much more pain portfolios
could suffer in the worst case scenario, it may be pertinent to note the top 10
NSE500 best performers stocks in past three years.
I am competent enough to comment on the sustainability or
desirability of massive returns (even after correcting massively in past
6months) given by these stocks. I will leave the worst case scenario analysis
for these stocks to the readers.
However, if you need a guide to make assessment of the worst
case scenario, the list of worst performing 10 NSE500 stocks could be of help.
If someone wants to reject these two lists as totally
incongruent with each other, I may reluctantly agree, but that is besides the
point I am trying to make.
Two simple short points I am trying to make here are—
(a) The benchmark indices could fall another
10-12% from here without distorting the technical anatomy of the bull market
that started in March 2016.
(b) The pain to investors going forward could
continue to be disproportionate, given that one third of the market is already
trading below 7000 Nifty level.
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