THE MARKETS
There are so many people looking for bottoms in the various markets these days, that the women have started feeling attention deprived.
The global financial markets have seen unprecedented capitulation in the past few months. The volatility indices have reached new highs while the benchmark indices have reacted in the exact opposite fashion. There has been across the board selling, defying all valuations and rationale, primarily on account of deleveraging and redemption pressures on funds.
Question thus arises where lies the bottom and an end to all this carnage which has got all retail investors perspiring real drops of sweat over the notional mark to market losses in their portfolios. Like so many so called ‘experts’ on TV, print media as well as the investor community, I will also attempt an answer to this pervasive question. However, unlike the former, I will not don a ‘know it all’ cap or pretend to be an ‘expert’ who predicted this all along. The bottom line is that nobody….period…..nobody predicted the timing or extent of this fall, and most of the ‘experts’ we see on TV today are merely following the direction of the market while putting on the act of predicting it.
I will not get into ‘levels’…as that is the ‘domain’ of technical analysts…and in my view sheer nonsense. I say this with intended affront…for statements I hear from such analysts as I did only yesterday “if crude breaks below 60 dollars, it could head to 59” never fail to impress on me the sheer genius and analytical insight therein (pun intended). Nor have I been able to translate such statements into a profit making strategy…both in theory and practice.
What I believe about the markets is that they are close to, if not already, bottoming out. I believe that the Indian stock market will continue to see consolidation over the next few months, but the volatility will taper down. Gradually we will see strength and momentum building up and higher levels in 2009. Nevertheless, it will be a long time before we see the previous highs getting breached.
However all this is not necessarily good news. Historically, markets have bottomed out far ahead of the revival of macro economic conditions. And in my view we are in for harder times in India over the next few months. While the fundamentals of the Indian economy remain intact, with a worst case scenario GDP growth of ~7-8% in FY 09 and ~6.5-7.5% in FY 10, two things have been materially altered in India, by the happenings in the global economies in the last few months.
First is the liquidity position. Both in the credit system and the financial markets, there has been a huge drain of liquidity, on account of redemption pressures, deleveraging, write-downs and most importantly on account of complete strip down of counterparty risk appetite. There is no cash in the system, and whatever cash has been pumped in by the RBI vide its management of the monetary policy (read CRR, SLR cuts in the past few weeks), sits pretty with the banks in the face of their inherent unwillingness to lend prompted by their anticipation of upcoming defaults and write-offs both on the global and domestic front. So much so, that the interest rate cuts by the RBI have also not seen a pass through effect to home loans and consumer finance loans. The FII’s have been consistently withdrawing funds from India, with a net buy of ~Rs. 1200 crores appearing only on 31st October after a string of sell figures totaling upto ~USD 10 bn over the last few months. I believe the liquidity crisis is going to get worse. There are impending defaults by the NBFC’s, redemption pressures on mutual funds and real estate companies. Many projects are going to suffer delays or total stoppages and financial closures will be deferred. The IPO market has become non-existent in any case. The capital intensive sectors will be worst hit, second only to financial services. It will be a long time before we once again witness the times of flush liquidity and money for the asking.
Second factor which has been altered is the sentiment. Notwithstanding the position of liquidity going forward, sentiment will take a long time to get back to where it was. Sentiment has been smashed at all levels. The banks and financial institutions are unwilling to deploy funds in the system and are preferring to sit on cash to cushion them from the looming disasters in the future. Corporates have faced a mauling in the capital markets and suddenly find themselves strapped for cash to meet their capital requirements. Not only have the avenues for raising future capital requirements dwindled, the capital raised in the past, whether by way of promoter’s pledging their shareholding or by way of FCCB’s have now become a noose around the neck owing to the free fall in the market capitalizations of such companies. To add insult to injury, the high interest rate regime is bearing down on the earnings which are already battered on account of slowdown in global markets and the fast depreciating rupee. Consumers have also become pessimistic and are resorting to much higher level of savings (FD’s are back in vogue). Spending is already seeing a slowdown in the face of rising EMI’s. Imminent are steps by organizations to cut costs and downsize in view of poor earnings growth trajectory. Needless to say, this will have a cyclical effect throughout the system and feed on itself for a considerable period of pain.
All in all it appears that we are all in for a rough ride in the near future, but coming back to the markets, I believe that it is the best time to invest in select stocks. No one can predict where the markets will be this time next year, but anyone following three rules listed below and investing today is assured to make a handsome return over this period. The three rules in my view are –
1. Invest in fundamentally strong companies which are in a sector having impetus from the India growth story and not having substantial exposure or dependency on the global markets.
2. Invest only such amount of funds as one can put away for a 3 year horizon without having to draw on the same for meeting the expenses or repaying liabilities.
3. Do not leverage, take positions only in cash.
If the above rules are followed, and one is careful about the stocks selected, there is plenty of value to be encashed from these beaten down levels. Of course it is a totally different thing to act than to write for the former requires deployment of hard cash and ignoring the dull pain in the pit of the stomach that would be accompanied by a 20-30% fall in the stock invested the next day after ou have bought it!!!
In conclusion, I would just like to say that nothing written here is new to any of us. These are observations and facts that all of us are aware of. Much of it may also appear overly pessimistic. Unlike the ‘experts’ I would love to be proven wrong and see our financial system and markets revive swiftly in the next few months. But I fear that much like the human body, it takes a long time to recover from illness (more so psychologically than physically), especially when such illness is caused by the over-indulgence in satiating the materialistic desires to the point of ignoring all guiding posts of fiscal prudence.
Let’s not have any illusions of self grandeur…It was the over leveraged system which created us….and it is the same over leveraged system that is taking us down!!!