Here Comes the Knock-Out Punch...

13 MARCH 2020

The world markets are now officially in bear territory.

A "bear" market is defined as when the price declines 20% from its peak.

The Dow Jones Index of 30 stocks and other indices are now in bear territory - ending the longest bull market in recorded stock market history.

It is Friday the 13th today - a supposedly unlucky day.

Given how the futures markets are behaving as I write, the BSE-30 Index is likely to crack another 8% today and flirt with the 30,000 levels....

My message remains the same as in my Honest Truth of March 11:

The troubles of the world financial markets did not begin with the realisation of the fact that there is more debt in the planet than at any point in history; or the fact that central bankers have been so busy printing money that they have forgotten what it means to be a repository of faith in the financial system. The nakedness of the central bankers is so apparent that people have begun to believe in crypto-currencies which are, at best, bundles of digital code wrapped around hot air!

No, it did not take any of the known economic parameters to begin to deflate a ridiculous bubble: it took a virus, which is 1,000th the dimeter of a human hair and all of 0.000000004 metres in diameter to prick a hole in the falsehood that has been created since the bail out of the financial system in 2008.

Table 1: Markets in a bear grip

Index Peak March 12, 2020 % change
BSE-30 Index 41,953 32,778 -21.9%
Dow Jones 29,551 21,201 -28.3%
MSCI All Country World Index 581 429 -26.4%
MSCI Emerging Market Free Index 1,147 883 -23.0%
Dollar Index 99.9 97.3 -2.6%
Oil, Brent USD per barrel 146 32 -78.1%
Source: Bloomberg

Greed and Fear in numbers

The unravelling of the debt excess in the US and the developed world will take time to play out and, in India, the government will be more focused on winning states, Rajya Sabha seats and scoring more wins over a dead Opposition. The economy will continue to drift.

Note the meticulous planning of the Scindia defection.

Note the treatment of the economy.

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The only support to the market will be phone calls to LIC and SBI to rescue some failing institution. That is a dangerous game which can end badly if the rescuers, themselves, are in trouble - ask those familiar with the collapse of Unit Trust of India! Note the collapse in the price of State Bank of India after the haphazard rescue of Yes Bank was announced. Probably Rs 200 bn (Rs 20,000 crore) of the erosion of market cap of Rs 400 bn these past few days is due the fact that SBI is being used as a bail-out fund.

Even in an arranged marriage, the bride gets married once: here SBI and LIC are asked to cope with a drunken, reckless groom every quarter! The plunder of public money continues.

This utter disrespect for the problems facing India's economy is the fear - and the likely reality.

But the numbers are making me greedy.

I have updated the earlier table of March 9, 2020 data with closing prices of March 12, 2020 - before the likely mayhem of Friday the 13th.

To put things in perspective, I had charted how the market has behaved over the past few years, across various milestone events that shaped the political, economic, and financial landscape of India.

Table 2: Finding an entry point?

Event / date BSE MidCap BSE-30 Reliance HDFC Bank YES Bank Gold USD/INR
Modi wins, May 16 2014 7,766 24,122 540 401 109 1,294 58.78
Demonetisation, Nov 8, 2016 12,961 27,591 502 626 245 1,277 66.62
GST July 1, 2017 14,809 31,222 691 827 299 1,220 64.88
ILFS Default Aug 28, 2018 16,671 33,897 1,319 1,031 371 1,208 70.11
Balakot, Feb 26, 2018 14,318 33,974 1,231 1,053 230 1,326 71.14
Modi wins, May 23 2019 14,650 39,832 1,329 1,184 140 1,286 69.53
Peak (different dates) 18,247
Jan 2018
41,953
Jan 2020
1,610
Dec 2019
1,302
Dec 2019
394
Aug 2018
1,675
Mar 2020
58.46
May 2014
March 9, 2020 13,554 35,635 1,114 1,107 21 1,673 74.09
March 9 2020 v/s Peak -25.7% -16.1% -30.8% -15.0% -94.7% -0.1% -26.7%
Potential profit if back to peak +34.6% +17.7% +44.5% +17.6% +1,776 % +0.1% +21.1%
March 12, 2020 12,380 32,778 1,063 1,021 25 1,562 74.22
March 12 2020 v/s Peak -32.2% -21.9% -34.4% -21.6% -93.7% -6.7% -27.0%
Potential profit if back to peak +47.4% +28.0% +52.4% +27.5% +1,476% +7.2^ +21.2%
Source: Bloomberg, where date not available for a particular day, then next day is taken; Share prices in INR and Gold in USD per troy ounce;

The further decline in prices of shares has made the indices more attractive.

There is some interesting Upside Potential, or potential profit, if you were to buy the specific stocks now and assume they get back to their past peak levels over, say, the next 2 to 3 years.

How will that happen?

With the help of either some jaadu mantar or some good policy.

But there are some "bets" I would be very cautious about: Yes Bank, Reliance and the INR, for instance.

In a few days of trading, the Upside Potential over a 2 to 3 year period, for the mid cap indices has surged from +34.6% potential gain to 47.4%. For the BSE-30 Index the Upside Potential of the Index regaining its peak has moved from 17.7% to 28.0%. After today's likely mayhem it could be higher by another 5% to 10%!

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Your option is a "safe" bank deposit at 6% per annum - and a risk that your deposit is frozen.

Or a liquid fund with a 6% annual return.

Not much has changed in terms of the uncertainty that India will face since the last Honest Truth on March 11, which includes:

  1. A slowing economy within India due to the stress on the banking system and lack of job creation;
  2. A slowing global economy - though the price of oil may make India "rich" by maybe USD 30 billion from less expensive oil imports, the fact that economic activity is low suggests that tax collections from imports and profits from exports may also be low. Hence, saving money on oil imports may not necessarily be a big plus for India. We have a total trade value of USD 1 trillion with the world -lower oil will save is 5% of our USD 600 bn in imports which is good if oil remains at that level for the year and we can lock in future supply at these prices;
  3. Capital inflows may stall: as foreign investors review their risk allocations, they may decide to take some money off the table and sell out of India. On a US Dollar return basis, the Indian stock market has not had a stellar performance for the risks that a foreign investor takes on investing in India and away from their home country. Since May 2014, the returns by investing in the Quantum Long Term Equity Value Fund was 5.7% and the Quantum Equity Fund of Funds gave a return of 9.8% while the BSE-30 Index was 8.2% (all are per annum, annualized). When converted into US Dollar returns, the return of the BSE-30 Index works out to 3.8%. The Dow Jones 30 Index has given a return of 9.1% in US Dollars during this same time period. A slowing or reversal of capital flows is not good for markets and could also see a dent in the currency - offsetting some of the gain from lower oil prices;
  4. The unknown of the coronavirus: no one knows how long this will last and what the eventual end result is likely to be. Uncertainty is not good for markets. The belief that India will benefit as multinationals decide to diversify their risks away from China-based factories is true. But no one knows when - or by how much. For all we know, this virus may set off a desire to build more factories in the home country of the developed world multinationals and not to outsource. With newer technologies and robots, the decision of multinational companies may not be an automatic win for India.

So, should one add to the equity portfolio?

My views on demonetization and GST are known - and not liked by many!

I believe that both these steps hurt the Indian economy.

The BSE-30 Index was in the 27,000 to 31,000 range in that 2016/2017 period.

It is at 32,500 levels now, up by 10%.

Over the past 3 years, companies have added maybe 10% to 15% to their earnings, in aggregate.

In that sense the market is not expensive: I am paying 10% more to buy an Index that has shown earnings, in aggregate, 15% higher than what they were before demonetization.

But we don't buy stocks for the past earnings.

We buy it for the future expected earnings.

And this is the stumbling block - globally and locally there is no visibility on when the economy will recover and how companies will profit from it.

It may be a long wait.

In May 2014 we were optimistic about the ability of the BJP to bring in reforms that would kick start the Indian economy. Today, very few have the same belief in vikas as the economy languishes - even before the global crisis created by the coronavirus.

Nevertheless, despite the uncertainties of when we can see a rebound in the Indian economy, it may be good to allocate some money to equity - provided you had kept some money aside for doing so! Don't sacrifice your safe money for a chance to make returns on investments. That safe money remains your sacred pot, never to be invested in stock markets.

A few weeks ago, I had indicated that I was adding to my portfolio of Quantum Equity Mutual funds by moving money from the Quantum Liquid Fund. I continue to do that, in tranches. This is what I wrote last month:

Overall, I have been a little "defensive" in my asset allocation and have a lower exposure than I should have in the various Quantum equity mutual funds. For now about 15% of what I should have in other Quantum mutual funds is parked safely in Quantum Liquid Fund. As can be seen from my "target" I plan to switch about 15% of my investments from Quantum Liquid Fund to the Quantum Multi Asset Fund and the various Quantum equity funds - when I feel more comfortable with stock market valuations.

I continue to use this sell-off as an opportunity to invest more in equity funds. You need to understand your financial situation and risk-appetite better to decide what you should be doing. This is not a blind "buy on the dip and make money" story. It could be a long and bumpy journey.

Table 3: Moving money to equity, steadily

Allocation, as of Jan 31, 2020 % allocation My target
Bank deposits (not in FDs) 2% 2%
Quantum Liquid Fund 25% 5%
Quantum Multi Asset Fund 5% 10%
Total, Safer and Liquid 32% 17%
Quantum Equity Funds, various 47% 62%
Quantum Gold Fund / ETF 21% 21%
Total 100% 100%

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)

Quantum Long Term Equity Fund, Quantum Equity Fund of Funds, Quantum ESG India Fund Quantum Gold Fund
(NSE symbol: QGOLDHALF)
Quantum Liquid Fund
Why you
should own
it:
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% in total in both; Maybe 15% in QLTEF and 75% in QEFOF and 10% in Q ESG 20% Keep aside money to meet your expenses for 12 months to 3 years
Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"
Disclaimer: The Honest Truth is authored by Ajit Dayal. Ajit is Founder of Quantum Advisors Pvt. Ltd which is the Sponsor of Quantum Asset Management Company Pvt. Ltd - the fund manager of the Quantum Mutual Funds. Ajit is also the Founder of Quantum Information Services which owns Equitymaster and PersonalFN. The views mentioned above are of the author only and should not be acted upon unless the reader has sought detailed financial advice from a qualified individual. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author, Equitymaster, Quantum AMC and Quantum Advisors do not claim the contents of the article to be accurate nor accept any responsibility for the same. Please read the detailed Terms of Use of the web site.

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1 Responses to "Here Comes the Knock-Out Punch..."

Sunil Doshi

Mar 13, 2020

Ajit Sir,

Nice article.
1 Typo: Balakot is 2019...not 2018.
Pls. correct:"Balakot, Feb 26, 2018"

Rgds,

Like (1)
  
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