Indian markets from Sept 19 to Apr 20

We pray and wish that this post finds you all safe and healthy at home. Staying safe and calm, maintaining social distancing and avoiding an overdose of news are our three biggest weapons in these uncertain times.

Over the last eight weeks, our world has changed! From late Feb onwards, the coronavirus has spread across the world and we are seeing unprecedented global lockdowns with devastating economic consequences.  We have been in touch with many of you via calls, blog posts, WhatsApp, email etc. We will continue to do the same.

In this post, we would be looking at three specific areas –  how the market has reacted over the last few months, future outlook for markets and what we should be doing going forward.

Equity markets from Sept 19 to April 20

Over the last 7 months, the equity markets have seen a net correction of 17% from September 19 till now. For those who follow the markets on daily basis this has been a very volatile ride in three phases

1. From Sept 19 to mid Feb 20 – The markets saw a 12% rise
   1. Retail auto sales held strong and consumer spends started to recover after the twin blows of GST and demonetization
   2. Foreign investments and inflows into India were very high (both FDI and FII)
   3. Industrial and Services data were both picking up. In fact, the Feb 20 data released this week showed a 4.5% growth in Feb. Similarly, our Services PMI hit a 7 year high of 55 in Jan. There was no evidence or need to exit equities by end of Feb
2. From mid Feb 20 to 23^rd Mar 20 – The markets saw a 35% fall
   1. The triple waves of corona virus, oil price drops and the Yes bank challenges occurred simultaneously
   2. Sovereign wealth funds (SWFs) from oil producing countries sold equities, when oil dropped from 70 $ a barrel in Jan to 25$/barrel in March
   3. Passive ETFs sold equities based on their quant models
3. From 24^th March 20 to 9^th April 20 – The markets have seen a 20% rise
   1. The US, European Union and Japan have announced huge stimulus packages to support their economies (running into trillions of dollars)
   2. The oil producing countries have come together to reduce production, giving support to the oil prices
   3. India’s weightage in the MSCI emerging market indices will go up due to which we may see about USD 7 billion of foreign investments in the coming months
   4. SEBI put in curbs on short selling which has reduced the volatility partially

Future Outlook for Equity Markets

The coronavirus and the lockdown is an unprecedented event. When the world re-opens it will be a different place in the short and long run. We need to be ready to embrace change and be flexible. There will be a lot of economic pain over the next two years.

The outlook for the equity markets as always, depends on our time horizon. Let us look at both of them now

• Long term time horizon – Five years or more – The long-term return expectations for equities remain intact and have in fact strengthened in this crisis. The key would be to invest in good quality stocks, after understanding their business models
  • Markets have always recovered from all the past falls – The long-term outlook for high quality, resilient companies remain extremely strong. As we have shared through various studies (as shown in our previous blog post), equity markets have always recovered from falls of even 50% or more
  • Five to Ten-year valuation discounts are available today – Many quality companies are available at compelling valuations. Well known firms like L&T, Wipro, ONGC, ITC, Sun Pharma etc. (please note that these are not individual stock recommendations) are available at multi year lows.
  • Indian mid and small have already seen huge corrections over the past two years – Small caps are available at 2011 valuations and mid-caps at 2014 valuations, while at the same time they have improved their business metrics and profitability. We should leave the market cap decisions to seasoned fund managers now

• Short Term Horizon (next 1 to 2 years) – we should never invest in equity for the short term expecting sudden recoveries. The markets will definitely be volatile in the short run, particularly over the next six months.
  • Nobody Knows in the short run – It’s very difficult to predict how the markets will react to the news flow in the coming days. Howard Marks, a very acclaimed fund manager has written beautifully about the markets here. His even titled the first memo as ‘Nobody Knows’.  Subsequently, each week in March 2020, he has updated his views and released his thoughts. He remains optimistic about buying into equities at this juncture.
  • Will the markets test recent bottoms or will it go down further? – The answer to this question depends on two things – 1) when a medical solution will be found for the virus and the infection curve starts flattening out and 2) extent of stimulus extended by the Indian government. Until we get an answer to these two questions, there will be short term volatility and we may retest the bottoms and go down even further also in the short run

What should we be doing going forward?

The answer to this question has always remained the same. We have reiterated these principles in each of our discussions/communications. Let us summarize the same again

• What we should be doing
  • Have a separate emergency corpus in fixed income to meet our urgent spends and short-term goals (please revisit this amount again and increase it, if you feel so)
  • Private medical and life insurance will always be a must. If you don’t have one or you feel inadequate, go and get it now
  • Continue to stick to your long-term plans with asset allocation based on your goals
  • Look at your risk tolerance – for those who feel that watching the market moves every day is mandatory and that every 5% market drop will spoil their mental health, then reducing your equity exposure and moving into bank deposits is recommended (even if it means it will adversely impact long term financial health)
  • These are good times to continue our SIPs, increase equity allocation if your cash flows permit it
  • Fixed income deposit rates will continue to go down in the near future. So, if you are particular about fixed income do lock in your investments now
  • Please pay your EMIs if your cash flows allow it. The 3-month RBI Moratorium only delays the interest payment and does not waive it. Delaying credit card payments will be particularly costly

• What we should not be doing
  • Speculate in the market hoping for a sudden recovery
  • Selling equity holdings at these valuations if our goals are far away and we don’t need the money now
  • Picking stocks directly – Direct stock picking is even more challenging in these times. We should resist the temptation to pick the next multi bagger on our own
  • Binge watching the news channels/newspapers/mobiles for market updates!!

• Should we put more money in Equity now?
  • We are having individual conversations with clients as the answer depends on each family’s asset allocation, cash flows and risk tolerance
  • In general, we are optimistic about investing now. The overall market valuations are definitely attractive for good long-term returns
  • Stagger your fresh investments over time
  • Do not expect short term returns and be prepared for volatility/downside in the near term

None of these points are new to our readers and clients. But these are the basic and golden principles for wealth generation. To summarize, we cannot control what is happening externally. But we can try to control our behavior. By staying calm and logical, we can protect and enhance our financial well-being. Stay safe and calm and be in touch!  Please feel free to reach out to either of us anytime to discuss about investments, portfolio at this critical time.