In the past couple of days, some readers have uncharitably criticized me for being excessively paranoid; and some others have even accused me of fear mongering. It has been pointed out that I was writing the same stuff in the spring of 2022, while markets did much better in the subsequent two and a half years.
Though I need not respond to every criticism, I would take this opportunity to reiterate my view that the economic conditions in India started to worsen from FY23. Now it is reflecting conspicuously in data. The cyclical improvement in corporate earnings post Covid stimulus and unexpected onslaught of ‘revenge consumption’, was erroneously assumed to be a structural and durable earnings cycle. These erroneous assumptions have actually resulted in a valuation bubble; bursting of which shall cause more pain than timely realization of error and course correction would have.
Remember, over a longer period, stock prices do always converge with the economic realities. However, in the interim phase, stock prices may diverge and stay elevated for a much longer period than a rational mind would assume. But as Friedrich Nietzsche famously said, “The irrationality of a thing is no argument against its existence, rather a condition of it.”
Three consecutive years of superlative returns from the stock market does, in no way, change the fact that Nifty 50 has yielded a return of ~10% CAGR over the past 10 years and ~12% CAGR over the past twenty years. This return is the same or marginally lower than the growth in nominal GDP of India during these periods. In the past five decades, in no period of consecutive 10 years, stock market returns have exceeded the nominal GDP growth by 10%. Excess returns, if any, made in a period of 1-3 years, invariably get normalized over the next couple of years.
The question that everyone needs to honestly answer is “whether you bought stocks, or invest in a business?”
· If you bought a stock, you were purely speculating about the likely demand and supply dynamics of the market over a near time horizon. You were not bothered about things like the economy and business then; and you should not be bothered about such things now. Stay true to your thesis and respect your risk appetite.
· If you invested in a business; carefully assessing the intrinsic value and the future growth prospects of such a business, you should be focusing on the business and let the stock price converge to the business fundamentals in the due course. You should exit if your assumptions fail.
If you try to jump between these two boats midstream, you are certain to drown, regardless of your swimming skills.
How much more downside is left?
Under the current circumstances, it is common to hear, “This stock is down 50% from its recent highs. How much more could it fall?” I do not have any straight answer to this question. Actually, I believe that no valid answer exists for this question.
For example, at the close of the market on 12th February 2025 we could say that if the market sustains 22835 for two days and manages to close above 23110, we could see it going again to 23800 level. Else, it would fall to 22425 and then to 22070 level. However, if 4QFY25 results disappoint or February sales figures for auto and cement continue to remain sluggish we may see earnings downgrade and potential market de-rating as macro indicators are likely to remain weak.
If this does not make sense to you, well it actually does not.
The potential downside in a falling market and upside in a rising market are always daily rolling targets. Technical targets are usually conditional (e.g., “if market falls below this level, it could go to that level else…) and generally do not account for exceptional moves. Price targets based on fundamental valuation and historical discounting trends are dependent on materialization of a multitude of complex forecasts regarding likely revenue, profitability, cash flows, capex, project execution, policy environment etc.
As of this morning, the market price of 360/500 constituents of the NSE500 index is down 25% to 75% from recent high levels; the rest 140/500 are down 3% to 25%. If you ask me “how much more these stocks could fall?” I would say, “I do not know”.
Nonetheless, I may highlight, in the 2011-2013 period about 150 NSE500 stocks fell more than 95% from their recent high levels, and most of them could not recover their loss even after ten years. These were the stocks which fell 80% or more after first falling 75% from their recent high levels (from Rs.100 to Rs.25 and then to Rs5). I can just say that there is nothing to suggest that this could not happen again.
