What to do now is the question on everyone’s lips after the bloodbath on Thursday. I would say stop watching television!
Don’t worry, there will always be good picks in the market.
MUMBAI: What to do now is the question on everyone’s lips after the bloodbath on Thursday. I would say stop watching television!
Jokes apart, the markets fell over 4% on Monday, fell another 4% on Tuesday and recovered all of it to end on a positive note on fund buying and short covering. On Wednesday, the market closed up over 3% on the back of a rally in commodities. On Thursday, the markets fell close to 7% on back of the global market meltdown exacerbated by a Central Board of Direct Taxes draft document on taxing foreign institutional investors (FIIs).
The reason for the global meltdown: a higher-than-expected consumer price index (CPI) data in the US, which led to fears of further rate hikes and slowdown in growth, and a fall in demand for commodities.
Given the pullback in India in the last few falls, there is a bit of complacency attached to any correction. I believe that the current correction will last a longer period of time and will have its impact on the market sentiment.
Just as they led the bull run, FIIs will also lead the market fall. They have had great returns and now see things slowing down. The risk premium has also gone up with further interest rate hikes ahead. FIIs have been selling aggressively as seen by the net sales numbers over the last four days.
Essentially, if markets were to move up, led by commodities, we are saying that high commodity prices will not have an impact on inflation and will not affect growth. Central banks need not have to raise rates as benign inflation and high growth exist side by side.
There is no utopia. The markets are now starting to believe that high commodity prices will prompt higher inflation, more interest rate hikes and slower growth. So demand for commodities will come down, leading to a fall in asset price-led stock market boom globally, especially in emerging markets. The fall has just begun and like anything which goes up too soon too fast, the way down will be pretty severe.
So what to do now? Clearly, sell asset-inflation stories. Commodities and property stocks have risen on rising asset prices and are ripe for large-scale correction. One thumb rule to adopt is, if you take away rising asset/commodity prices, what is a company left with? Brand? Cost leadership? Economies of scale?
For example, Tata Steel can withstand commodity downturns much better than Essar or Jindal Steel, purely because of its status as the lowest cost producer of steel in the world.
Sell asset-inflation stories in the mid-cap and small-cap space aggressively. These companies do not have the bandwidth to survive any kinds of downtrends. And liquidity is an issue.
Sell interest rate sensitive stocks — financials, banks, autos and housing are sensitive to interest rates. Interest rates are set to go up as central banks raise rates to fight inflation.
Sell Left-sensitive stocks - retail (Left will block FDI), Banks (No FDI again) and Oil (it’s better to let oil companies bleed than pass on oil price increases to consumers)
Cash is king. Get into minimum 30% cash.
There will be good picks in the market always, but that calls for a high amount of discipline, which, unfortunately, most of the investors seem to have forgotten in the current bull run. Buy into companies where government interference is least and do not have any asset-price inflation valuations in them. Strong products, good brands, globally competitive businesses, ability to scale are some of the traits which protects against market downturns.
Where is the end for the correction? This question is as difficult to answer as the question of “where will the rally end?”
However, the signs to look for are obvious. The extent of market fall, outlook on inflation and interest rates, FII activity, outlook on commodity and asset prices, political stability with signs of reforms, monsoons and earnings growth forecasts are some of the factors that would go into judging the end of the correction.
And, of course, market sentiment.
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