The Terminal (2004)in an interesting movie directed by Steven Spielberg featuring Tom Hanks and Cahtherine Zeta-Jones in the lead roles. Tom Hanks finds himself stranded at the JFK International Airport, New York. He is not allowed into New York city by the airport security manager. The security manager tries every trick up his sleeve to send Tom Hanks back to his country. For every trick, Tom Hanks would respond by saying ‘I Wait,’ and refuses to go back home without visiting New York city. Investors seem to be in a similar mood and following his mantra:
“I Wait”
Of course, Tom Hanks’ long- wait would be fruitful at the end. I doubt whether equity investors would be benefited from their “waiting & watching” mode to buy good quality stocks. Investors who take more risk during the highly uncertain times are rewarded the best in markets. And we are going thro uncertain times now.
Global Investors are afraid of recession in the US and Europe. The same sentiment is echoed in India too with benchmark Sensex losing about four per cent for the week ended August 19. However, the benchmark indices do not truly represent the kind of pessimism and negativism that exists in the minds of Indian equity investors. Till a few weeks back, experts treated rising inflation as problem number one for India. However, fast changing developments have taken place and now people seem to be less worried about inflation. Our mindspace is now fully occupied by political controversies surrounding the ways of tackling India’s corruption. This means to say that corruption has now become India’s number one issue confronting the nation.
Business media loves stock market crashes. Newspaper editors seem to be fast running out of adjectives/epithets to use for headlines. In the last two weeks, they have already used up their repertoire of words – bloodbath, mayhem, massacre, butchery, carnage, slaughter, sea of red, stocks bludgeoned, distress sale, etc. What words will they use if markets fall further next week? It’s strange that the more educated we are the more we use primitive and tribal words signifying that ‘homo sapiens’ has not yet come out of the cave world!
Global cues
Some European nations and the US seem to be hurtling toward recession. There are concerns that the US is going the way of Japan – long-term decline. While the stock markets are going down the world over, the government bond prices are moving in the opposite direction. The price of the benchmark 10-year US Treasury security had gone up with its yield going down below 2 per cent for a brief period last week. This is the lowest yield for the benchmark 10-year US Treasury since the World War II. (Bond prices and yields move in opposite direction.). Standard & Poor’s has tried to calm the markets by telling that it is confident of France maintaining its AAA rating. Stocks are falling while gold and silver are going through the roof.
Gold price is the ultimate Fear Index
Gold price (in dollar terms) has gone up by around six per cent, while Sensex and Dow Jones have gone down by more than four per cent for the week ended August 19. World gold price is quoting at $1,850 per ounce while in India it is quoting at about Rs 28,000 per 10 gram. Gold seems to be the ultimate Fear Index. Investors are scared that paper currencies are in danger of becoming toilet paper! The high government debt in the US and eurozone is threatening the growth prospects of economic growth in the developed world. However, Indian investors may start selling their gold partially and switch their money to good quality Indian stocks gradually as part of risk management. Let us assume gold touches $2,500 per ounce and then it starts to fall. When everybody starts selling gold there will not be anyone left to buy your gold except Chinese central bank. Remember Tulip mania of 1600s?
Corruption and hypocrisy
We Indians are hypocritical about tackling corruption. Indira Gandhi famously (one can say notoriously) said, “Corruption is a global phenomenon.” It would be no exaggeration to say that corruption has touched every nook and corner of India. Corruption is entrenched in our minds. Everybody is affected by it. Some are positively, but the poor highly adversely. Strangely, the most corrupt in India keep their ill-gotten in gold and real estate! There are several businessmen and middle classes who love corruption. But, outwardly they maintain a façade of honesty. I think it’s time we admitted that we are corrupt. If we realize that we are corrupt, we can take up the cudgels against corruption sincerely and effectively. Realisation is the first thing in solving the problem. One fervently hopes that our lawmakers would find a way out of the deadlock through dialogue, debate, sagacity and statesmanship.
Indian markets
Indian equity investors seem to be concerned about the consequences of the prolonged agitation against the scourge of corruption. The controversy surrounding the arrest of Anna Hazare is not good for the country economically and politically. The earlier the crisis is resolved the better for us. Let us hope that serious and sincere action is taken by the Government to punish the guilty swiftly.
Reserve Bank of India has been repeatedly saying that it will not stop its fight against inflation despite global problems. RBI’s statements have not helped the markets.
It is wrong to look at narrow benchmark indices like, Sensex or Nifty. We need to look at broader indices, like, CNX 500 or BSE 200. Many mid-cap and small-cap stocks have fallen by more than 50 per cent in the last one month. It is too scary to see that highly volatile stocks, like, IVRCL, Lanco Infratech, HDIL, IDFC, Crompton Greaves, metal stocks falling like nine pins in a matter of one or two weeks. Even a heavyweight like, Tata Motors, has fallen by around 50 per cent since its peak of Rs 1,390 in November 2010. As a result, investors’ individual portfolios’ are showing negative returns of between 25 and 40 per cent in just one month.
My take on Indian Equities
We watch motorists walking free after spectacular crashes and burning flames in motor races. The motorist comes out unscathed because:
--- the race cars are designed keeping safety in mind
--- the race car drivers wear helmets, seatbelts and other safety equipment, and
--- quick help is at hand to rescue the drivers from accidents
Unfortunately, we investors do not follow such time-tested risk management practices in equity markets and we end up losing badly in stock market crashes. If we lose money in stock market, nobody will come and mitigate our losses! Our own misconceptions and misdeeds are responsible for our losses and we should not blame markets for our self-made losses. The simple rules for risk management are: diversification (but not over-diversification), good asset allocation, not borrowing money to invest in stocks, keeping winners and selling losers and buying only what we know.
It’s foolhardy to think that we are so intelligent that we can pick up stocks at rock bottom. The probability of our finding stocks at abysmal levels is extremely remote. Hence, the best strategy for common investors is to pick up fundamentally good quality stocks even as the Sensex has fallen by 20 per cent year-to-date to the current level of 16,150. The assumption here is that common investors are having surplus cash on hand and have the risk appetite to invest in stocks, which are one of the highly risky asset classes.
Don’t sell if you are holding good stocks, like, Bharti Airtel, Bajaj Auto, Power Grid, Hero MotoCorp, L&T, Tata Steel, BHEL, TCS, Infosys, M&M, HDFC, HDFC Bank, etc., unless you are badly in need of money. Likewise, you better stick to your companies with good pricing power: Asian Paints, Pidilite Industries, Exide, Amara Raja Batteries, Nestle, Bosch and others. There are several mid-cap companies with reasonable valuation, like, Unichem Laboratories, Maharashtra Seamless, IDFC, Coromandel International and Biocon. One needs lot of patience and total portfolio approach here. These companies have weathered many a storm and are likely to do well in uncertain and difficult times. Investors can consider investments, in a staggered manner, in good equity mutual funds, like, HDFC Top 200, Quantum Long-term Equity, Franklin India Bluechip, Canara Robeco Equity Diversified, HDFC Prudence, DSPBR Top 100 Equity, Fidelity Equity, Reliance Regular Savings Equity, Sundaram Select Midcap and exchange-traded funds, like, Benchmark Nifty and Benchmark Junior Nifty.
India’s finance minister says that the he would not be in a position to sell government stake in public sector undertakings due to stock market crash. If the government is unable to proceed with its disinvestment programme, it would further weaken the precarious fiscal situation as India is grappling with rising fiscal deficit. It will have repercussions for the government bond market.
After Sensex has fallen from 19,000 to 16,000, it’s very easy to predict that it will come down further to 15,000 or 13,000. As is well-known, stock markets go up or come down very sharply and in no time. At any point of time, we cannot rule out markets falling by 10 to 15 per cent in matter of a few weeks as there are real doubts about Indian economy growing at a respectable and reasonable rate of eight per cent annually.
For many investors, stocks look more attractive at 21,000-Sensex than at 16,000-Sensex!
Fact is stranger than fiction, do you agree?
Important Data:
Disclaimer: The author’s views are personal. He has a vested interest in the stock markets and his views should be taken with a pinch of salt. He may change his views very fast without any notice depending on the market and economic conditions. His views should not be construed as investment recommendation. Investors need to consult their certified financial adviser before making any investment decisions.
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