Vijay Kumar Gaba: Sensex

Showing posts with label Sensex. Show all posts

Thursday, June 22, 2023

View from the top

The benchmark Sensex has recorded its new all-time level today, surpassing its previous high level of 63583 recorded in early December 2022. Nifty50 is also few points from its previous highs. In the past six months, since December 2022, both the indices have taken a huge swing of over 10%.

Optically the markets may appear flat for the past six months, as the benchmark indices are almost unchanged; but a deeper dive would indicate that many material shifts have occurred in the market during this period of six months. For example-

· Nifty50 is almost unchanged for the past six months, Nifty Midcap100 has gained over 9% and Nifty Smallcap100 has gained over 7% in this period.

· The sectors that led the markets to new highs in the post Covid period, i.e., IT Services, Pharma, Energy and Metals have actually yielded negative returns in the past six months; while the FMCG sector has been the best performer in this period.

· Nifty PSU Banks that are the best performing sector for the past one year, have actually yielded a negative return for the past six months.

· Despite the turning of rate cycle upwards, popular rate sensitive sectors like Auto and Realty have been amongst the top three performing sectors.

Despite sharp outperformance of broader markets, average market breadth for the past six months has been mostly negative. The months of January-March 2023 in fact witnessed the worst market breadth in over two years.

Another pertinent point to note in this context is that Indian markets have sharply underperformed the most emerging market peers and developed markets in the past six months. Note that in 2022 India was one of the top performing global markets. This is in spite of net foreign flows being positive in the past six months to the tune of Rs500bn (vs Rs1256bn outflows for 2022).

Taking a comprehensive look at the market performance during the past six months, I would draw the following conclusions:

1. From the sharp outperformance of broader markets it is evident that the sentiment of greed is overwhelming the investors’ fears; and signs of irrational exuberance are now conspicuous.

2. Most of the good news (rate and inflation peaking; earnings upgrades; financial stability; etc.) is already well known & exploited; while the fragility in global economy and markets has increased and hence the present risk-reward ratio for traders may be adverse.

3. From a historical relative valuation perspective – Nifty is currently trading at ~4% premium to its 10yr average one year forward PE ratio. The same premium for Nifty Midcap100 is 14%; while Nifty Smallcap100 is trading at ~2% discount to its 10yr average one year forward PE ratio. The discount of smallcap PE ratio to Nifty PE ratio is presently close to 22%, larger than the 10yr average of 16.5%. The sharp outperformance of smallcap may be a consequence of value hunting and irrational exuberance, rather than greed; and the traders may soon return to Nifty as the valuation gap is filled.

In my opinion, therefore, it would make sense to take some money off the table, especially from broader markets and high beta stocks.

Tuesday, June 9, 2020

Don't let greed or fear overwhelm you

The bench mark Nifty is trading above the psychologically important 10000 mark after three months. The benchmark had slipped below the 10k mark on 12th March 2020 exactly after two years. It last traded below this mark for couple of days in March 2018. The date 12th March 2020 is important because, this was two week before the nationwide lockdown was announced.

At that time the confirmed COVID-19 cases were less than 300; much lower than anywhere in the world, and there were no travel or business restrictions in place. The market panic was mostly due to the problems brewing in the debt and commodities markets. The earnings disappointment was persistent and economy had shifted to slow lane many quarters ago.

Obviously, the correction in Indian equities from the all time high level recorded on 20 January 2020 had started without much regard to the socio-economic displacement caused by the outbreak of COVID-19. In fact, on 23rd March Nifty closed at 7610, about 39% lower than its 20th January highest level of 12430. This was a day before the prime minister announced the total lockdown at 8PM on 24th March 2020.

Nifty has since recovered 34% from the low of 7610 on 23rd March 2020 to about 10100 odd levels yesterday. In view of this wild swing of 40% down (12430-7610) and 33% up (7610 to 10100), market participants have been overwhelmed by a variety of emotions.

There are many who got panicked in March, when the market was in a free fall with little signs of the socio-economic (viz., lockdown) disaster that was to follow. In panic, they liquidated their equity and debt positions and moved to cash. Many of them canceled their SIP mandates. The up move that followed was swift and inexplicable. Most found it to be a dead cat bouncing around and ignored. Disbelief and regret are the feelings dominating their sentiments presently.

Then there are others who were already sitting on cash waiting for a major correction to buy equities. At peak of 12400 they were praying for sub 10k levels to rebalance their portfolios by increasing the weight of equities. At sub 8K level they revised their entry target to sub 6000 level. These people are overwhelmed by the feelings of disbelief and denial. They continue to believe that this up move is unsustainable and Nifty must make new 2020 lows in anytime soon.

If someone asks me, I would suggest the following. Though this may sounds cliché and unexciting, this is what eventually makes a good investor out of you.

(a) Define your asset allocation carefully and follow it religiously. By your intelligence you can identify great investment ideas and earn huge profits. But asset allocation discipline will make you retain and enhance those profits.

(b) It is easier said than done, but don't allow the sentiments of greed and fear overwhelm you. A moderate amount of both sentiments is good because that will allow you to avail opportunities and avoid disasters. But excess of any one is undesirable.

(c) Indian economy shall remain stuck in slow lane for many more quarters. The aggregate corporate earnings shall reflect this reality, as has been the case in past many years. However there are some businesses which are doing very well and may continue to do so. Focus on these businesses rather than bothering too much about aggregate numbers or benchmark indices.

(d) SIP is usually done to take advantage of sharp market declines. Cancelling mandates at lower level defeats the very objective of SIP.

(e) In strict technical sense the present up move has some more distance to cover, before it pauses to think about retracements. But this all is a jargon for very short term traders. Investors need not care about this.

Wednesday, March 18, 2020

2020 not like 2009

The sentiment on the street eerily looks similar to the one we saw during 2HFY09, post collapse of Lehman Brothers. In those days, the rumors of large banks declaring bankruptcy, sovereign defaults, imminent EU breakup, market freeze, sounded absolutely believable. These were not only market grapevines believed by the common investors. Many senior analysts at global investment banks wrote scary reports about these eventualities. Globally reputable, economists and strategists pained doomsday scenario of global economy slithering into a deep abyss to compete with the great depression post WW-I.

In India, many depositors transferred money from private banks to the public sector banks. Investors summoned their advisers for details of their liquid fund portfolios. The fixed maturity plans (FMPs) backed by bank CDs were pre redeemed by paying penalties. Capital protected structured products were also called prematurely by incurring material losses.

Some of the readers have likened the current situation to the 2009 panic sell off. A few believe that going by the reactions of central banks in the developed world, it appears to be already worse than 2009. Many readers have wanted to know my view as to how much worse it could go before the rock is hit.

To all my readers, I would request that I am no Taleb, Rajan, or Roubini who can assess the gravity of situation and make a prophecy almost instantaneously. I am an ordinary micro investor in the local Indian financial markets, who can access the data relating to past trends with some efforts and roughly correlate that data with the present conditions to make a naive assessment of the situation.

My assessment of the present situation is that presently we are nowhere close to the rout in asset prices seen in 2009. In 2009, Sensex had ended 18% lower than the July 2006 level from where the bull market had started. The BSE Midcap and BSE Small Cap had ended the cycle 36% and 41% lower than the starting point.

The current bull market started from end of February 2016. As of yesterday, the Sensex was higher by 36% from the start date. BSE Midcap and BSE SmallCap were higher by 24% and 16% respectively. Besides, the gains recorded during 2006-2008 were much higher than the gains made during 2016-2018. The severity of the fall in 2008-09 was therefore much more intense and deeper.

In my view, we may not a fall like 2006 this time, because of the following four simple reasons:

(a) Foreign investors had pumped in huge money during 2004-2008 in Indian equities. This time they are huge net seller during 2016-2020 period.

(b) The earnings growth fell off the cliff during FY09 to FY11 period leading to de-rating of Indian equities. This time the earnings growth has remained anemic and has little scope to disappoint materially. In fact it may surprise on the upside from 2HFY21 onwards.

(c) Indian's economic growth has seen multiple downgrades in past two years, unlike 2008-10 when the world had great expectations from India's economy.

(d) Presently, the leverage in Indian stock market is significantly lower than the 2008-09.

Nonetheless, we may certainly fall further from the present level, before hitting the rock.

Friday, October 11, 2019

Fear dominating the greed

In past few months, a large number of prominent market experts have publically stated that the present phase of market correction is perhaps the worst they have seen in their life time. Many of them have recently indicated that the Indian equity prices may be close to their bottom and a recovery is imminent.

In view of these assertions by the prominent market personalities, I find it pertinent to examine, whether equity prices are close to hitting the rock (if not hit already).

For me, the most successful, though intuitive indicator of market bottoming is the dominance of "fear" over "greed". The phenomenon is usually reflected by a combination of the following three factors:

(a) Sharp underperformance of broader markets as compared to the benchmark indices, for the current market cycle.

(b) Materially negative market breadth for the current market cycle, indicating capitulation of large number of non institutional investors.

Current market cycle

There is difference of opinion as to when the current market cycle actually started. The purist believe that the current market cycle started from end of August 2013, when the newly appointed RBI governor unleashed aggressive measures to stem the worsening CAD and the finance minister also announced a number of measures and Nifty bottomed at 5287 on 27 August 2013.

Whereas a number of market participants believe that the cycle that started in 2013 ended in mid February 2016, and a new cycle started with presentation of budget for FY17 on 29 February 2016 after a Nifty closing of 6825 on previous day.

Both the groups have different parameters for the Nifty bottoming. The first group believes that the current market cycle shall end with Nifty breaching 10k mark in next 6-8months. Whereas the second group believes that the Nifty has already made a bottom on 19th September 2019 around 10700 level, even though a new cycle in Nifty may take some time to commence.

I am inclined towards the latter group and believe that the current market cycle is close to the bottom, though a sustainable up move may be 6-9 months away. In the interim lower levels for Nifty may not be completely ruled out.

Greed and Fear Index

Scenario 1: Present market cycle started in August 2013

If we presume the current market cycle started from August 2013, the greed and fear index is far from bottoming.

(a) The market breadth is overwhelmingly positive for NIFTY500 as well broader markets.

(b) The CAGR for mid and small cap indices is much better than the benchmark index.

Scenario 1: Present market cycle started in August 2013

If we take the current market cycle from February 2016, the greed and fear index is close to the bottom.

(a) The overall market breadth has become negative while for Nifty500 it is a healthy 2:1, implying the capitulation for low quality stocks.

(b) The CAGR for small cap (8%) is almost half of benchmark index (15%) and close to the bank deposit rate leaving no risk premium for the investors.

Both in 2013 and 2016, the cycle changes were accompanied by the heightened volatility. We are currently witnessing a similar phenomenon, which supports the hypothesis that the fear may have begun to dominate the greed.

To conclude, in my view the Indian equity markets are close to completing the bottoming process for the current market cycle that started in February 2016. The next cycle may commence anytime in next 6-9 months, but it is more likely to start in 2H2020.