Dangerous To Time The Market

When you will be reading this story, in any form (print or digital), we must have entered the new Vikram Samvat 2076 and we will be witnessing a laying down of a solid foundation of a long lasting bull run in the Indian stock market. Actually that will be a continuation of what we saw on September 20, 2019, when the finance minister (FM) Nirmala Sitharaman in her last of the four booster doses announced a hefty cut in corporate tax rate and we witnessed one of the highest gains in the benchmark indices Nifty and the Sensex.

Though the benchmark indices of the markets have returned only nine per cent (Sensex and Nifty gained 3,157 points and 1213 points respectively) during current Samvat year 2075, which will end on October 27, 2019 (this story was written on October 21), the stage of optimism is being set in such a way for Samvat 2076, that all-time peak level achieved by frontline measures (Sensex at 40,312 points and Nifty at 12,089 points) during June 2019 will be surpassed and new record level will be achieved. However, the journey to the new peak will be equally stormy and will pass through high volatile path. The market movements in the second half of the financial year 2019-20 (FY20), post Diwali, will be crucial and we will be discussing how to make a way out of it in the following lines. 

Just a couple of weeks back, there was pessimism all around with the slowdown in economic growth, lack of consumer demand, liquidity or the crisis of confidence, negative sentiment in the capital markets leading to a huge erosion in the market capitalisation (M-Cap). It is very easy to be coloured by the news-flow and dwell on the past and present data points. The four booster doses announced by the FM for the economy, spread over five Fridays during August-September, have the vigour to kick start the economy and improve the sentiment for businesses and for the capital market participants.

It has been more than 20 months of difficult conditions. While optically the benchmark index, the Sensex and Nifty, does not represent the true picture, the larger pain has been in the broader markets which include mid and small cap stocks. From the start of 2018, it has been a rough and rocky ride to navigate for the investors. Extreme polarisation of such a magnitude has been a phenomenon, which very few market participants would have experienced in the last few decades.

Global trade war tensions have been at the centre stage of market volatility. Indian markets, especially post budget (July 5), have been facing multiple headwinds. The Sensex and Nifty peaked in June 2019 (ahead of budget) at its all-time high level of 40,312 and 12,088 points following the installation of the NDA government, who came back to power with a bigger and firm mandate. In the subsequent days, however, the optimism began to fade. On July 5, when FM presented her maiden budget, the Sensex and Nifty settled at 39,513 and 11,811 points respectively. Both the measures, are still trading 215 points and 150 points lower as on October 19, after 10 weeks of presentation of budget,

Equities have been under constant selling pressure from the foreign portfolio investors (FPIs). There existed genuine reasons for their offloading. Global financial institutions like IMF, World Bank and global rating agencies like Moody’s Investor Services have drastically scaled down growth prospects for the Indian economy. India’s GDP grew by meagre 5 per cent in the first quarter (Q1) of FY20. Consumer demand, which was considered one of the major driving forces of the economy has slowed down. Experts too agree with this.

Himanshu Kohli, Co-founder, Client Associates, says, “There is absolutely no doubt that Indian economy is slowing down. India has for long been touted as a resilient, domestically driven growth nation but consumption, the primary driver of growth, appears to be weakening. Quarterly GDP growth for June came in at a shocking five per cent, well below the market consensus of 5.6 per cent. Tight liquidity conditions following the IL&FS default, NBFC crisis, the delayed transmission of rate cuts, suboptimal implementation of the government support package for the farmers and a global slowdown which is adversely impacting exports, are factors which have resulted in the economy slowing down, witnessed in the latest IPP numbers too.”

R Venkataraman, Managing Director, IIFL Securities too echoed the same sentiment. He says, “There is no denying the fact that we are experiencing a slowdown. However, the recent government actions to improve business confidence like significant reduction in corporate taxes are changing the sentiment of India Inc. In terms of profitability, the corporate tax rate cut may increase corporate’ earnings by five to six per cent. Long-term benefits of the tax cuts would become visible over the next two  to three years.” 

The recent actions taken by the government in terms of corporate tax rate cut, reduction in repo rate by the Reserve Bank of India (RBI) and such others are time consuming measures. Its impact comes with a time lag and hence for the immediate future, at least for the next one quarter, we may see the current trend to continue.

Umesh Mehta, Head of Research, Samco Securities says, “Given the timeline for the next three months, the outlook for equity market seems neutral with a positive bias. Debt markets will be more greased going ahead as the liquidity conditions are easing, confidence returning and interest rate coming down would lead to more demand for credit which should help kickstart the growth engine. Bond prices have more or less stabilized and we don’t think much will change by Christmas.”

Though it seems or it is being orchestrated that the government has offered more market friendly measures post budget, than in the budget, it is yet to initiate important reform initiatives, feel market participants.

Naveen Kulkarni, Head of Research, Reliance Securities, says, “Government has taken measures but one of the biggest reforms for ease of doing business in India is labour reforms. This is a challenging area and involves parliamentary approval. While this could be on government’s agenda, its execution process is time consuming.”

All the major macro-economic indicators are showing signs of weakness. The latest one to join this list, according to the RBI, is Inflation. The rate of inflation is expected to touch four per cent, which should halt the interest rate easing process  by Q4FY’20. 

Lakshmi Iyer, CIO – Debt and Head – Products, Kotak Mahindra Asset Management says, “We remain overall constructive on interest rates in India. The easing cycle is likely to continue in the near to medium term, which bodes well for fixed income markets. Lower cost of borrowing for corporate India would help corporate earnings with a lag and hence will be good for equities too over medium-term.”

Venkatraman also says interest rates are expected to remain down given the inflation and growth challenges. Liquidity upturn will likely happen and over the next 3-6 months growth is expected to pick up, he adds.

Market participants are optimistic for the slowdown in the Indian economy to go fast. There are reasons for it. Indian economy is the highest growth economy amongst the larger economies of the world. International Monetary Fund (IMF) may have projected slowdown in global growth still Indian economy will find a place in the top slot for fastest growing market this year. However, there are some major structural reforms required that will drive the growth of our economy as we go forward. The realty cleanup through RERA, establishment of the Insolvency & Bankruptcy Code (IBC) and an eventual improvement in Tax compliance through GST provide a structurally sound base for the next upswing in the economic growth. “There will be a focus on right sizing and productivity as we go forward from the corporate world. This will eventually help improve the profitability in the next 1 to 2 years,” Kohli says.  

Some signs of revival in market sentiment was visible last week when shares of IRCTC, a government undertaking were listed on the bourses. After Avenue Supermart Ltd, owners of supermarket brand D’Mart, this was the only company, whose shares doubled on the debut day.

Venkatraman says, “The stupendous listing of IRCTC clearly shows appetite for good assets owned by government. Considering the attractive levels of small and medium stocks over the last two years, we expect investors to be positively surprised over the next few years. We believe that we are at the last leg of the down cycle.”

The government has expressed its intent to privatise BPCL and Container Corporation of India. Its successful divestment has the potential to be the game changer for Indian capital markets. “A bold privatisation move will change sentiments and attract overseas funds. We have to keep in mind that global liquidity is high (abundant) with negative interest rates,” adds Venkatraman.

Even the Centre seems to be betting big on the bull run in the equity as it has set an aggressive target of raising Rs1.10 Lakh Crore through disinvestment. Though there is a high positive correlation between the primary market and the secondary market, the current situation prevailing in the secondary market is taking its toll on the primary market, barring an IRCTC exception.

However, Kohli seems to be sceptical about centre succeeding in meeting its divestment target. He says, “It looks difficult but not impossible that the government will be able to meet its target. Hence the fiscal deficit will widen this year. However, if the sentiment improves in the next few months and the Government is able to reach closer to it, it will be a pleasant surprise.”

 In the short term, markets are dependent on sentiment which is followed by liquidity. Fundamentals take a back seat in the short term. However, in the long run, sentiment and liquidity even out and it is only the fundamentals, which makes a difference. Fundamentals of Indian economy, both on the macro front (GDP growth rate, twin deficit, inflation, interest rates, forex reserves, currency volatility and oil prices) as well as micro (earnings growth and valuation) will take some time to improve. In the last few weeks there were a number of announcements made by the government to improve the sentiment. On the reduction of Corporate tax rate, the market reacted very positively as we saw September month FPIs turned net positive investors in India, while on some other announcements, it was a lukewarm response.

Kohli lauded the government’s intent to improve the sentiment and says, “Their intent to take India to a $ 5 Trillion economy by 2024 looks very positive. Though, it may be difficult to achieve the target, it is quite inspirational and shows this government means business and the focus will be development of our economy.”

Having said that, the million dollar question here is when will the market sentiment improve and what is the right time to enter the market. The good thing is that equity markets are more volatile than the economy and its movements either way, precede the economy by few quarters. Besides this there is a higher risk of timing the markets and staying away from the markets. Lots of investors wait for the economy to recover and they miss the opportunity as equity markets already move up before the economy starts moving up.

Kohli says, “To succeed in the market one needs to stay invested in the markets over a longer period. Since 1990, the BSE Sensex has compounded at the rate of 14 per cent per annum which is making one’s capital 50 times. However, if someone missed the best 20 days (only 20 days in 28/29 years) due to timing the market, the compound annual growth rate is only 7.7 per cent which means the capital has grown only nine times against 50 times during the period. If one has a long term horizon, it is best to stay invested and if there is an opportunity, invest systematically from your regular savings”.

Venkatraman also agreed and says, “We have seen a significant fall in market, especially sentiment in mid and small cap segment has been quite bad in the last two years. But many stocks are priced attractively at the current juncture. The India story remains amongst the brightest narratives across the globe and long-term investors will benefit for sure”.

Indian markets slipped into correction mode post the presentation of the budget. Corrections are a normal part of the ebb and flow of markets. There have been 28 such major corrections across the global markets since World War II and there will certainly be many more to come over the years!

Experts are of the opinion that such volatile times meant well for investors to rebalance their portfolios. Fear tends to lead to some very ill advised moves by investors. Look at the state of those investors that sold out of their equity positions at or near the bottom of the financial crises in late 2008 or early 2009. There are countless stories in the media about instances where these folks sold out of panic, booked very steep losses and then sat on the sidelines through all or much of the ensuing recovery in stocks.

It is very well possible, that the leaders of the last rally may or may not be the drivers of the next up move. The classic example was the infra and real estate euphoria from 2006 to 2008, which did not find favour amongst the investors post that cycle and all these stocks are reduced to a fraction of their erstwhile values. Also, people who would have invested in pharma and telecom sector stocks from 2009 to 2014 and are still holding those, would not be a happy lot.

Disruption has become the buzzword and one needs to understand whether the business (of the stock they are investing in) has the wherewithal to survive the onslaught of the new entrants or technology. Long-term investors should also keep a check on the changing business models and dynamics of their portfolio constituents. “Align portfolios with themes, which will work for the next three to five years”,  opines experts.

As Indian economy comes back from a low growth phase and corporate earnings start showing traction, markets will start to discount it a bit earlier. A combination of time tested models which have survived the difficult economic and market cycles with strong market share and visibility of robust earnings growth should ideally continue to do well.

The current period is a difficult period but also a great opportunity for seasoned investors to differentiate from the rest of the crowd. Difficult times offer opportunities to highlight the importance of processes and discipline of asset allocation. In fact, it is a better time to highlight the value provided to investors compared to the bullish markets. Retail investors should not lose focus from their life goals, particularly in such volatile times, to arrive at the wealth required to be financially independent and should concentrate on what asset allocation can help them to meet their goals. In difficult times like these where there is so much of confusion, sticking to asset allocation is the most important thing. If equity has underperformed in the recent past and has come down from your policy, change the route but not path of investing. Instead of taking direct exposure one should switch to MF route to accumulate equities on a regular basis.

While giving an important advice to investors, Kohli says, “Remember one thing, tough times offer opportunities and if today some of the companies or mutual funds are available at a 10 to 25 per cent discount compared to what they were 12 to 18 months back, buying them today will help you to average out your purchase price provided there is liquidity available with you and there is a space available from your asset allocation point of view”. 

Nobody can call an exact bottom. Tops and bottoms are only for fools. The only long-term guarantee in investing is that there will be short-term fluctuations. Invest in tranches, in the long term one stands to benefit from a well thought out strategy. Till then, wish you all Happy Diwali, prosperous Samvat 2076.

Invest intelligently. With inputs from Himali Patel