Vijay Kumar Gaba: Bear Market

Showing posts with label Bear Market. Show all posts

Thursday, February 16, 2023

No bear market likely in 2023 as well

It was spring of the year 2022. The news flow was worsening every day. The Russia-Ukraine conflict was dominating the global media headlines. NATO-Russia acrimony was at its worst since the cold war era. China committed to a zero Covid policy and implemented strict mobility restrictions, further impacting the global supply chains. Inflation was beginning to spike and most central bankers were ready to embark on an accelerated tightening cycle.

Back home, the enthusiasm created by a path breaking budget had not survived even for a whole week. Issues like macroeconomics (growth, inflation, current account, yields, INR), geopolitics (Russia-Ukraine), politics (state elections) and persistent selling by foreign portfolio investors (FPIs) was dominating the market narrative. The trends in corporate earnings also were not helpful to the cause of market participants.

By early March 2022, the benchmark indices had fallen substantially from their highest levels recorded till then, between October 2021 and January 2022. The Nifty50 was down ~11%; the second most popular benchmark Nifty Bank was down ~16%, the Nifty Midcap 100 was down ~14% and the Nifty Smallcap 100 was down ~17%. Though technically, the market was still in ‘correction’ mode, sentimentally it did feel like a ‘bear’ market.

Amidst all the gloomy headlines and bearish forecasts, I felt that we are most likely to witness a boring market rather than a bear market in India during 2022 with breadth narrowing. (see here). Since then benchmark Nifty is higher; but it has mostly moved in a range occasionally violating the range on both the sides.

Since the beginning of 2022, Nifty50 (+1%) is almost unchanged and midcap (-3%) have performed mostly in line. Nifty Bank (+10%) has been major outperformers; while Smallcap (-20%) have underperformed massively. The market breadth has accordingly been mostly negative.

Nothing much has changed in the past one year - the geopolitical situation remains fragile; the war continues; inflation remains a worry; economic growth is decelerating; earnings growth is slower than anticipated; rates are higher and expected to remain elevated for long; monsoon is expected to be below normal; and FPI outflows continue. To add to this we are entering an intense election season that should culminate with general elections in March-May 2024.

However, the narrative now is not negative. At worst it is neutral. The war is now on the 13^th page of the newspaper. It is neither mentioned in the prime time news headlines nor does it trend on social media. Central bankers have successfully anchored inflationary expectations and the popular discussion is around peaking of rates & inflation rather. The US and European recessions are not a consensus now. India growth is also estimated to be bottoming above 6%.

Given these fragile macroeconomic & geopolitical conditions; declining optimism over earnings growth; higher debt returns and optimistic equity positioning, it is important to assess what could be the market behaviour in the next one year?

In my view, we may not see a decisive direction move in Nifty50 in 2023. It may move in a larger range of 16200-20600 in 2023, averaging above 17600. We may therefore not witness a bear market in 2023. Smallcap stocks which have been underperforming for quite some time now may end up outperforming the benchmark Nifty50 for 2023; though gains could be back ended.

Friday, May 20, 2022

Choose your path wisely

The investors are finding themselves standing at a crossroad again. For seasoned investors this is nothing new, but for a large proportion of investors who have started their investment journey in the past 5 years, this is something new.

At this juncture everyone has to choose a path for onward journey. The options are rather simple –

(i) Continue the journey in the north direction - Stay with the extant strategy and hold on to your investments.

(ii) Take a right turn towards the East - Review and restructure your portfolio of investments in light of the new evidence.

(iii) Take a left turn towards the west – Change the strategy and rebalance the portfolio in favor of Safety and Liquidity from Return previously.

(iv) Turn around and move back in the south direction - Liquidate the whole or a substantial part of your portfolio and wait for an opportune time to begin the journey afresh.

The empirical evidence suggests that the vintage of investors and size of portfolios plays an important role in making this decision. The seasoned investors and/or investors with larger portfolios usually avoid the fourth option and prefer the options listed at (i) and (ii) above; whereas the newer and/or investors chose from the options (iii) and (iv).

In my view, choosing an option is prerogative of the individual investors. I am sure, they make a decision which they consider best as per their investment objectives, risk tolerance, and personal circumstances. The problem however occurs, in most of the cases, when the investors avoid, delay or precipitate a decision. Avoiding a decision makes you jittery portfolio values move beyond your risk tolerance bands; delaying or hastening a decision often leads to wrong decisions.

The question is whether it is an appropriate time to take a decision; or the investors may take some more time to decide the future course of action; or is it already too late to take a decision.

I believe that each investor will have to answer this question individually; and I can speak only for myself. In my view, it is a bit late to make the decision, but not too late.

I would however like to mention a few historical facts that might help my fellow investors in making an appropriate choice.

Prima facie, the market conditions today may appear to be similar to the conditions during dotcom boom, bust and resurrection (1998-2000-2004). Like the dotcom bubble, this time also the market rally was characterized by the new age businesses with undefined business models and negative cash flows for prolonged periods, commanding unsustainable valuations. Like dotcom bubble, the low interest rates in past one decade fueled the bubble and rate hikes caused the burst.

· For records, Nifty had gained 127% (800 to 1800) in a short span of 15 months (November 1998- February 2000). It gave up all the gains in the next 18 months (September 2001). It took almost three years (November 2004) for Nifty to “sustainably” break past the 1800 level. In the present case Nifty gained 148% (7500 to 18600) in 19 months (March 2020 to October 2021). In the next seven months it has shed about 25% of gains recorded in the preceding 19 months. So, if we assume the present case to be a case of repeat of dotcom

· It is pertinent to note that while Nifty recovered the losses during the burst in 3years, many market leaders took much longer to recoup their losses. For example, Infosys took 6 years (2006), Wipro took 20 years (2020) and Hindustan Unilever took 10 years (2010) to reach their high levels recorded in the year 2000.

The present economic conditions are substantially different from 2000. The central bankers had sufficient ammunition to support the markets in 2000. The US Federal Reserve cut rates from a high of 6.5% in 2000 to 1% in 2004 to support the economy and markets. The inflation was not a worry and the new growth engines in the form of the emerging markets, especially India and China, were emerging fast to support the global growth. In the instant case, however, the central banks have virtually no ammunition left to stimulate the growth; all the growth engines of the world are stuttering and inflation is a major concern for the entire world. After all, the world perhaps has never seen a recession while the interest rates are still so low.

It is therefore reasonable to assume that the market trajectory may also be different than 2000-2004. Considering that the cycles (rate, Inflation, growth, etc.) are now much more shallow than 2000s. The rates this time may peak at much lower levels. We may not see global growth at 5% in near future and therefore inflation may not last longer either. The markets may not revisit 2020 panic lows and also may not take 3years to breach 2021 highs.

Nonetheless, the valuation readjustment within markets may be material and lasting. The valuations for many new age businesses that have lost significantly from their recent high might continue to correct further. Many of these businesses may fail to sustain and become extinct. On the other hand, some old age businesses that have corrected to “cheap” range may regain some prominence. So it would still be in order to restructure the investment portfolios.

For the record, I chose option (ii) a couple of months ago and took a Right Turn.

Friday, March 4, 2022

Boring vs Bear market

A barrage of bad news has made the market mood rather despondent in the past one month. The enthusiasm created by the “path breaking” budget did not last even for a whole week. Issues like macroeconomics (growth, inflation, current account, yields, INR), geopolitics (Russia-Ukraine), politics (state elections) and persistent selling by foreign portfolio investors (FPIs) have dominated the market narrative in the past one month. The trends in corporate earnings also did not help the cause of market participants.

While from their respective all time high levels recorded between October 2021 and January 2022, the benchmark Nifty is down ~11%; the second most popular benchmark Nifty Bank is down ~16%, the Nifty Midcap 100 is down ~14% and the Nifty Smallcap 100 is down ~17%.

In strict technical terms, Indian markets are still some distance away from a bear market. However, if I may use the Weatherman’s phrase “Indices are in correction mode, but feels like bear market”.

The tendency of the benchmark Nifty in the past one month indicates that the markets are putting up a strong resistance against the persistent selling pressure. So far a precipitous fall has been avoided; and the trends are not showing that Nifty will give up its resistance anytime soon. However, the same cannot be said, with as much assurance, about the small cap stocks, where the probability of sharp earnings downgrades (basically normalization of irrational exuberance) is decent.

One clear sign that the markets may not be anywhere close to entering the bear territory is the outperformance of cyclicals like metals, energy, textile, sugar, automobile etc. over the defensive Pharma, IT services and FMCG. Even if we look stock specific, the underperformance of traditional safe havens like HDFC group, Asian paints, Piddilite, Hindustan Unilever, Colgate, MNC Pharma, etc. indicates enduring risk appetite of the investors.

It could be argued that these safe havens are bearing the brunt of heavy FPI selling, who over owned these companies. But this argument may not fully sustain, since most domestic funds also like and own these stocks. They have however preferred to add cyclicals in their portfolios, indicating a higher risk appetite.

Another argument could be about valuation. Most of these safe havens were trading at relatively higher valuation, when raw material inflation and erosion of pricing power impacted their margins. A de-rating was therefore considered in order. This is a valid point but cannot fully explain the market trend. Most metal, textile and sugar stocks are also trading close to their peak margin and peak valuations. IT Services stocks have been sold heavily precisely on this logic.

Obviously, the market participants in India are not in a risk off mood as yet. How long this trend will continue is tough to predict at this point in time as the situation is too fluid and the negative factors clearly outweigh the positive factors.

My personal view is that once the global news flow gets fully assimilated and volatility subsides in next 6 to 8weeks, we are more likely to witness a “boring” market rather than a “bear” market in India.

The indices may get confined in a narrow range and market breadth also narrow down materially. The market activity that got spread out to 1200-1300 stocks in the past couple of years may constrict to 200-250 stocks.

The compounders or the boring safe havens are offering a decent valuation now after the correction. These may again return to favour. A few good men in the broader markets may get separated from the crowd of rogue boys and get the attention of the investors. There may be no clear sectoral trend. The leaders from all sectors may get favoured.

The giant wheel (continuous upper circuits followed by lower circuits) and roller coaster (high volatility) that excites the traders may stop, until it starts operating again once the sentiments and finances of traders are repaired.

Wednesday, February 16, 2022

Time for tortoise to chest the tape

In yesterday’s post I had highlighted that the previous two market cycles had not ended well for the broader markets (see here). By the time the cycle had ended, a large majority of stocks (smallcap and midcap) had given up much more than what they had gained on their way up. Only a couple of hundred stocks ended the cycle with some gains.

This is however not to take away anything from the fact that many stocks like Havells, Escorts, Page Industries, PI Industries, IndiaMart, APL Apollo, L&T Tech, SRF etc. changed their orbit and moved sustainably higher in the previous two market cycles. Also, many stocks either moved to the lower orbit or just vanished as the market cycles were coming to end. JP Associates, ADAG Group stocks, Suzlon, Jet Airways, DHFL, IL&FS, are some of the examples. This is the story of every market cycle and there is nothing unusual about this. This story will inevitably be repeated in the current market cycle also. By the time cows come home, some companies would have transcended to the higher orbits; many would have been relegated to the lower planes; and some would have made an ignominious exit from the markets.

The issue to examine at this point in time however is where do we stand on the current market cycle - Has the cycle peaked and the indices have commenced their descent? Is the market taking a pause and a lot of climb is still left? Have indices already completed their journey downhill and are close to their base camps?

It is of course beyond my sphere of competence to portend where the markets are heading in next few months. Thus I would know the answer to the above only in hindsight.

However, as I hinted in yesterday’s post (see here), the empirical evidence indicates that the current market cycle may be far from over. Therefore, we have either just started the descent and have a long way to go down; or it is just a pause in the climb.

If someone forces me to take a bet, I would bet on the “pause”, for the following five simple reasons:

1. The Indian corporate sector is embarking on a major earnings growth cycle, led by financials, after more than a decade. The valuations are nowhere in the vicinity of the “red line”.

2. The global central banks have already embarked on a major monetary tightening cycle. There is no reason to believe that their united effort would be defeated by inflationary forces. All central banks acting in unison shall be able to defeat inflation in next 6-9 months, as the logistic constraints due to Covid-19 have already started to ease materially. Lower inflation (or deflation) and smooth supply chains shall help both the consumption and manufacturing in India.

3. Higher policy rates and tighter liquidity shall impact the growth more in advanced economies as compared to the emerging markets. This shall reverse the direction of global investment flows towards emerging markets, as has been the case in the past tightening cycles.

4. The inflated (bubble like) valuation like new age businesses are a very small proportion of the Indian public market. A vertical crash in these valuations may not have a crippling impact on Indian markets.

5. In the past 5 years, Indian corporates have deleveraged their balance sheets materially. Most of the “large” bad accounts have been identified and the restructuring process is either completed or is ongoing. The probability of a major shock to the financial system stands significantly reduced.

In other words, for the markets to collapse from here we would need major disappointment in earnings; collective failure of central banks in reigning inflation; a global recession and collapse of some major enterprises. To me these events are less probable.

So how do I see the market moving in FY23?

I believe once the markets assimilate the impact of Fed lifting rates and geopolitical noise subsides in the next couple of months, we are more likely to witness a “bore” market rather than a “bear” market. The exhilarating “hope” trade (new age businesses, macro improvement, China+1, EV, PLI etc.) shall pave the way for the “patient” value trade that shall benefit from controlled inflation, positive flows and sustainable rise in earnings trajectory.

There is nothing to suggest that the existing stock of domestic money in the stock market may fly out in the next couple of years; even if the fresh flows slow down. As the breadth narrows down, the AUM of mutual funds and portfolios of investors may get more concentrated in top 150-250 stocks keeping the benchmark indices high, even though the broader market indices struggle at lower levels. In the past we have seen this kind of market during 1995-96; 2001-03; 2010-12, and 2018-19.

To sum up, FY23 may be the time when the tortoise may chest the tape while the hare lags behind.

Thursday, December 17, 2020

Are we in a bull market?

The benchmark indices are scaling new highs every week for past seven weeks as least. The sharp recovery in markets, from deep correction in March, must have surprised most market participants. Many who panicked and sold off in summer are wondering whether it’s time to “Buy” again. Many who remained invested are wondering whether it’s time to ‘Sell”.

The broader question therefore seems to be, whether we are in a new bull market since April 2020, and the stock prices have a long way to travel north before any meaningful correction sets in; or it is a bear market rally that is normalizing the steep fall in March 2020 in the wake of total lockdown announced post outbreak of pandemic.

The last bull market started from August 2013 and lasted 5yrs till August 2018. In case we believe that it is new bull market that would mean that the bear market that started in August 2018 ended with panic bottom of March 2020.

However, if we believe that March 2020 panic fall was an aberration and the current sharp up move is just normalizing that aberration, and the regular bear market will play out after this normalizing cycle is completed in next couple of months. In this case we shall see markets stabilize around in 11500-12100 range and then decline gradually for some time. We had seen a similar situation in 2006-2009. In May 2006, markets corrected 25% in 3weeks as the first signs of subprime crisis emerged. But then markets rallied almost 100% (from lows of June 2006) in June 2006-January 2008 period; only to bottom around June 2006 levels in March 2009.

The moot point is how do we decide what state the stock market is in at present! The signals from the markets are indicating that regardless of the one way move in the market, the popular opinion is divided.

For example, the following are some signs indicate to a bull market:

(a) Many IPOs since March 2020 have got tremendous response from investors.

(b) Analysts are either ignoring bad news or finding positive angles in bad news . For example, consider the following:

· One of the key argument for support of consumption related stock was the government support to the rural population. However, the news of PM-Kissan disbursement not happening (see here) was given a positive twist to imply that fiscal situation may not worsen after all.

· M&M subsidiary SsangYong default on debt was given a positive twist to imply that M&M is sticking to its commitment of not investing more capital in loss making subsidiary.

· Despite concerns over rising defaults on unsecured loans after the forbearance period ends, the valuations of many consumer focused NBFCs have breached the red lines. Analysts are supporting these valuations in the name of business consolidation, potential bank licenses etc.

· S&P forecast of 7.7% contraction in India’s FY21 GDP was widely reported as “upgrade”.

(c) All sellers are seen regretting almost immediately after the trade, as prices rise further before the payout is received.

(d) Traders, investors and even fund managers are searching for stocks that have underperformed the peers, and betting new money on them in the name of “value”.

(e) The social media timelines are overwhelmingly populated with success stories of popular traders and investors. The cautious investors are being guilt shamed by taunts of “I told you so”; and “I bought xyz in March 2020 and made return of $$$% in 9months”.

On the other hand, the following signs point to the possibility that it is a bear market rally that is normalizing the excesses of March 2020.

(a) There is no particular theme or trend in the recent rally in stock prices. Stocks from diverse sectors like Bajaj Finance and Kotak Banks have become most expensive stocks perhaps globally, while ICICI Bank and HDFC Bank have lagged. Tata Steel has reached peak valuation while Hindalco has lagged. Tech Mahindra has ralled hard, while Infosys and TCS have lagged. Asian Paint has outperformed HUL massively. RIL has outperformed Bharti.

(b) Domestic mutual funds have faced redemption in past couple of months. Domestic institutions have been net sellers so far this year, while foreign institutions have been net buyers. However, there is no clear pattern in the flows, indicating tentativeness and lack of conviction. Overall net institutional flows have been marginal ($3.5bn) YTD.

(c) Most of the rise in market has occurred due to valuation rating and not supported by earnings or forecast of earnings growth.

(d) Last week the top gainer in NSE500 included some companies facing survival issues.

Personally, I am more inclined towards the second view (bear market rally). But I would leave it to readers to apply their own wisdom and decided their strategy.

Wednesday, March 25, 2020

Change is only permanent thing

The past 5 weeks have been most horrific period for investors in financial since the five week period in September-October 2008. A colossal destruction of investors' wealth has already taken place.

There is an argument that this destruction is only a notional mark to market (MTM) loss if the investors' continue to hold the securities, as the prices will certainly recover as soon as the COVID-19 is contained; may be in 3-6 months. The proponents of this view are cautioning the investors that selling the securities at this point in time will convert the temporary MTM losses into permanent erosion in wealth.

Some readers have asked about my view on this argument. I have already expressed my views on this issue multiple times in past few months. Nonetheless, I do not mind a reiteration.

I believe that the market cycle in India that started from 2013 has definitely ended. Historically, the sectors and stocks that lead a particular market cycle, are not found to be leaders of the subsequent market cycle. Commodities in the early 1990s, financials in the mid-1990s, ITeS in the early 2000s, infrastructure in the late 2000s, and consumers in the past five years are some examples. Many star performers in these cycles (Andhra Cement, SAIL, VLS Finance, IFCI, IDBI, DSQ Software, Pentamedia, Suzlon, BHEL, Reliance Infra, JP Associates etc) did never recover their losses. Irrespective of the fact whether the investors sold these stocks during panic periods that marked the end of respective market cycles or held these stocks for many more years, their losses have been permanent in nature. In fact holding these stocks longer has only exacerbated the losses.

In my view, we would need to distinguish between the investors in mutual and investors who like to invest in securities directly.

Ideally, those investors who have invested in a mutual fund should not be worried, because the professional fund managers managing their money must recognize the need and time for change and adjust the fund portfolios accordingly. For example, most mutual funds today are not holding stocks of ADAG, JP Group, Suzlon, etc. Most of them would have sold the embattled Yes Bank, Vodafone, Zee Entertainment etc. also. By not redeeming these mutual funds during panic bottoms, investors may hope to recover their temporary MTM losses in due course.

However, this may not be true in the case of individual investors, who refuse or fail to effect necessary changes in their security holdings with the changing times. From my experience I know that many investors are still clinging on to the stars of previous cycles, which have become duds with almost no chance of recovery. For such investors, not selling during the times of panic may actually result in higher permanent losses.

It is also important to note that not selecting a good mutual fund manager may also result in MTM losses becoming permanent losses. A fund manager who is not dynamic and pragmatic enough to read the economic and market trends quickly may remain saddled with the non-performing assets for long, thus causing material permanent losses to the investors both in terms of erosion in portfolio value and opportunity cost.

Personally, I would therefore not buy or keep holding something just because it has fallen 50-60% from its recent highs. My portfolios of my mutual funds will definitely adjust as per the times, because I am confident about quality of my fund managers. My direct equity and debt holdings, I have already changed.

Wednesday, March 4, 2020

Anatomy of a bear market in equities

In past seven weeks, the Indian equity markets have corrected sharply. The benchmark Nifty50 index has fallen almost 9% in this period. The gauge of fear (volatility index) has risen over 60% in this period of seven weeks.

This sharp correction in values, when everything appeared to be working normally for Indian equities has triggered an intense debate about the sustainability of present levels of equity prices. Some prominent analysts and investors have highlighted that the 11 year old bull phase in global equities that started post Lehman collapse and commencement of easy monetary policies may just about to be over. The disruptions created by spread of coronavirus (COVID-19) may have opened many fault lines in the global financial system, hitherto camouflaged by the persistence monetary stimulus by central bankers.

Many technical analysts and chartists also fear an extended winter for Indian equities this time.

Since I have recently increased my allocation to equities, by cutting overweight on gold and bonds, many readers have wanted to know my reactions to these prominent market voices.

I would not like to comment on the views of various market experts. I am sure all of them have very strong basis to form their opinions and views. Moreover, I had explained my rationale for changing my asset allocation (see here).

I would not like to entertain a "valuation" argument at this point in time, because a lot of businesses in India appear standing at the threshold of a major transition. Therefore, both the numerators and denominators in the valuation formulae could be subject to dramatic changes in next 3-5years.

I would however like to highlight a few well know facts about the Indian equities, which make me believe that the downside in Indian equities may not be significant from the current levels. Since the rate trajectory appears firmly down to me, the relative outperformance of equity looks more likely to me.

1. The Indian equities have been in a bear market for past five year at least. The advance decline ratio of the issues traded on NSE has been negative for five years now.

2. Amongst the benchmark indices, only BankNifty has matched Bank Deposit returns over past 5years. Nifty Small Cap has returned negative return and Nifty just about managed the savings bank interest.

Over past two years, only Bank Nifty has returned positive return. Small and Midcap indices have lost massive ~18% CAGR and ~8% CAGR respectively.

3. Of various sectoral indices, only financials & services, mostly driven by few private banks and NBFCs, have consistently beaten the Bank term deposits, over past five years. Many sectors like Media, PSUs, commodities, Auto, Pharma, and Infra have given negative return of ~2% CAGR to ~14% CAGR over past five years. The returns have been significantly poor over past 2years. Only Financials and IT could beat the bank deposit returns over past 2years.

I am not at all suggesting that the Small Caps, Commodities, PSUs etc that have severely underperformed in past five year may outperform henceforth.

The point I am trying to make is that (i) a blanket opinion about Indian equities, or any market for that matter, may be misleading; and (ii) there could be plenty of opportunities to be availed in markets.