Are we reaching that point of maximum pessimism now?There is a lot of pessimism. There has been maximum pessimism across individual investors, small investors because the US market has not been comforting. Usually when India has had a bear market in the last eight, 10 years, something usually has given some degree of solidity and it has been the US market because the FAANG stocks over the last 10 years have provided some degree of hope that there is still a bull market somewhere and hopefully India will correct and then go back up.
This time for whatever it is worth, the US end has been absolutely ugly and while we sit in India and worry about us Indians and the Indian stock market, most people, including me, are thankful that we do not have a lot of FAANG stocks in our portfolios. I do have a bit but not a lot. I am sure that as a percentage of Indian household savings, I do not think a lot is in the FAANG stocks or in US tech because that part has been absolutely ugly.
The only way one can deal with a bad situation is when one looks at even worse situations. Let us say we have a headache and then you go and see somebody who has had a brain stroke and you will say that my migraine is nothing compared to this guy’s brain problem! When you have an ankle sprain and then you find a guy who has fractured a knee or something or a shin bone, you feel much better because it could have been worse.
So in situations like this instead of feeling sorry for ourselves we should look outside and see that the world is even uglier than what we see in India. One will be able to deal with problems only when one has a wider perspective of how bad things are.
What is the best way to deal with collateral damage? Sit on cash? This market will get better entry points to start putting whatever is left of the money to work? This is more like an Amazon sale and not the stock market sell?
Right. So now here is the thing. In situations like this, the way to play it is very simple; you have to buy strength, you cannot buy weakness. Let me clarify; 80% of your portfolio should be reshuffled into stocks and groups which are exhibiting strength and only 20% should be in stocks which have really crashed a lot but you believe that due to fundamental reasons, they represent good value.
The typical mistake that all of us – seasoned or un-seasoned investors – make is that we do the opposite. We keep our losers and sell our winners and that is usually a recipe for disaster because when markets recover and they will inevitably, it is really the strength group which would have delivered you positive returns even in a bear market while the weakness group will remain down and probably might even go lower.
And I will give you a recent example from my own portfolio. There’s a certain stock called Peloton in the US. When the price was $150 I wrote a put on it for $62 dollars. Guess what? It got exercised because the price fell to $40-45 at the expiry which was like a six, eight months out option and it was inconceivable that a stock as storied as Peloton could fall so much!
What are you supposed to do then? This stock should not have fallen so much. I am unfortunately long this stock at $60 and I have to sell. There is no point in waiting for it to recover back to go beyond $60, which is my purchase price. The mistake we all make is that we hang on to such losers. Yesterday Peleton was $11. That tells us that one should buy the strength part of the market and normal screeners will tell you enough about what groups are holding up well in this carnage. Buy those and only 20% should go into the really 90% down stocks or 95% down stocks if you believe that fundamentally they do not deserve to be there.
Should one trade and invest at all because it is a nightmarish scenario given the market volatility? If valuations are not that attractive, based on historical benchmark, then markets can certainly unwind a bit more?
We always can and I give you again a personal example that throughout the ‘90s and in fact for a few years even after that, after that tech bear market of 2000, a lot of my friends or even my relatives kept on asking me, “Should we go and invest in the stock market?” I told them that look this is no place for the bulk of your money because there are highly volatile returns unlike in rental income or fixed deposit income.
I would tell them please invest in fixed deposits or good corporate deposits which are not secured but still good names will give you your money back because you are getting 8%, 9%, 10% numbers even 12%. Equities were never ever attractive and that is why if you see the 90s was the loss decade for Indian stock markets. We delivered nothing in aggregate return. The IT pack did well but that was an exception.
Then the equity story came because of the collapse in interest rates globally and in India after the tech bust when rates were cut aggressively by all bankers and that is when the equity markets came back into their own and returns have been fairly decent in the last 10-15 years. Now that rates cycle again has started to worsen, when one looks at markets, it comes down to very simple things – the direction of the US dollar and the direction of interest rates.
If you simplify things down at this point in time, most investors will feel that equity investing is simply not rewarding enough and I can appreciate that point of view because it is not an easy way to make money. The figure of 15% compounding over 30 years which mutual fund managers trot out in every single forum is highly misleading. That 15 years is not every year, it is very lumpy, it is very bunched up. Two years of solid gains and then you have two-three years of very tepid in fact negative returns. Then it goes back up and really speaking for most investors they do not have the stomach for this kind of wild ride so I can appreciate their real concerns.
What will it take for markets to turn? Will it be crude, will it be Fed, will it be war?
First of all, we have to give it time. It is like an illness. There is not much you can do and you have no real fast forward button to hit and suddenly get cured. We have just kind of bottomed into this funky situation in the stock market. I do not think one can simply say that it will get over by next month. It will take some time and in that period, a few things need to change. Obviously commodity prices really need to cool off a lot, inflation, headline prints have to moderate.
We have to linearly go a few months down the road for the data to just look optically better because this data has to compared with six months down data and therefore time is really critical here. We need to sit this one out to expect that this gets over very quickly and is probably not a wise or at least not a sensible line of thinking.
That said, in this period, one will get the fundamentals and foundations of the next bull market for sure. From now until the end of the year, we will find stocks which are not falling, stocks which are delivering numbers, stocks that are really beating the market in this period. Build a portfolio for the next five years and that is really what most investors should be looking at. Instead of fretting over the losses, start thinking constructively where can I recover these losses and you may not be able to recover it from your existing portfolios.
There are two ways to approach that; option number one is buy something from the rubble, for example, IT has corrected, pharma has corrected, consumer tech has corrected. Option number two, let us look at price action. The markets are rotating, ITC is coming back, NTPC has come back, Coal India has done phenomenally well, what is Shankar Sharma the investor doing and how is Shankar Sharma the trader hunting?
I do not trade anymore. There was enough to tell us from the middle of last year itself that there was a problem building up in the markets but I do not have the wherewithal in me to be as aggressive a trader as I used to be 10-15 years back, I do not even need to be. I have gotten old, let us put it this way so I am not trading.
But on the investment side, obviously we are losing money. We will all get hit there is no way you are going to get into a boxing ring and you are the only guy throwing punches, you will get punches thrown at you, you will have to take them because that is what this game is about.You need not get KOed, you will have to bob and weave and survive 12 rounds because this is not an easy fight.
As I said, my strategy is to really look for strength. That is exactly what I am doing pre this call, post this call every single day. Where are pockets of strength in the market and then I will wait out a quarter for their numbers to– because it might be just a technical strength for some time, it may not be lasting, I will get confirmation from the bunch of quarterlies that we have seen we will see that in July also when the June numbers come out and then I will start to add those names and get out of names which are down and out and probably not coming back in the next bull market.
Does an HDFC Bank qualify as a stock which was a hero but now we must respect it has turned, how would you classify that stock?
…classified meaning turned for the worse?
Turned for the worse because the price action is not very conducive or very appealing?
That is true for pretty much all the private sector banks with the possible exception of ICICI Bank. if I am not mistaken, Axis Bank itself has done nothing for four years. For four or five years, the stock is more or less medium or even negative returns. HDFC Bank had similar two and a half years of negative returns, Kotak Bank a flat line, probably negative now for 2.5 years or two years, RBL Bank less said the better.
So the whole private sector bank place has not been a place to be in for the last two, two and a half years. If anything, they are a lot worse now because all of them drove their numbers through consumer lending and when inflation is a problem, people do not want to go out and borrow at high interest rates for sure.
One might think that Rs 100 rupees on EMI does not matter but then you are not representative, the real users are very sensitive to paying up more for financing cost or even just spending in an era where there is so much inflation. So discretionary spending will be definitely hit and these guys who are funding discretionary spending is not a good space to be in at all.
Should one start thinking slightly contra? In this market crash, should one buy commodity consumers rather than producers?
Killing inflation is obviously the primary purpose why central banks exist, it is not to foster growth, if you look at the charter mandates for all central banks. It is exactly that which is price stability and to that end, the western central banks have a tool which does effect inflation by curbing demand. Those economies are very highly leveraged in terms of their consumer spending, credit card debt, all that.
We the numbers are significant and therefore by tweaking rates, consumption is brought down which impacts growth and thereby inflation. In India, there is a different problem altogether. I am firmly of the view that the RBI has no control over inflation at all. It has control over growth and by raising rates, you kill growth but do not kill inflation.
Look at our inflation basket. There is hardly anything which is sensitive to interest rates, hardly anything. Fruits and vegetables, pulses make for 40-50% of the basket in CPI. The rest is a lot of supply side constraints and stuff like that and imported inflation through crude and other commodities.
There is very little RBI can do by tweaking rates. They have done it under pressure in my view. It is not advisable but they had to do something to show that they are acting. To answer your question, what you should be buying, you should buy things which have some degree of pricing power. I do not think you have a lot of companies falling into that category because even the branded FMCG companies have been cutting back on the grammage. Since they cannot pass on the price hikes, they are reducing the pack sizes.
In this environment, you talked about ITC and people will smoke a bit maybe that is the place to hide, if you want to hide. I do not think you are going to make 30-40-50% on that but maybe it does not fall because the names you mentioned did not rally at all, they did not participate and so obviously those names will do better in a bear market. It is the high fliers which actually take the beating which is exactly the kind of market we are in.
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