In our July’24 memo, we wrote that the Indian stock markets were in midst of the smoothest bull market in its capital market history, where we did not experience even a single 10% drawdown. Just to re-cap, between Mar23 and Oct24, the large, mid, and small cap indices delivered returns of 45%, 103% and 111% respectively. While there were valid reasons for rally, the smoothness and ferocity of the rally was beyond the comprehension of even the most optimistic investors.
That surreal phase is finally over, stock indices have corrected between 15 to 25%, and most individual stock may have corrected between 25-40%. Markets & portfolios have given up ~45% of the gains that were made in the bull phase. The fall has been more ferocious than the rise, with not even 3-5% bounce-backs (yes, it surprised even the rationally most bearish chartist that I follow). What adds salt to the injury is that this is happening when global markets are doing quite well, the two wars are about to end, and oil prices have corrected to India’s benefit.
Fall in stocks & portfolios are painful for everyone – from the proverbial panwala & rickshawala, to the youngsters & housewives on Zerodha & Groww, to the super rich HNIs and, the professional money managers like us. The human brain has evolved in manner that it treats even a temporary financial loss like a life-threatening event i.e. it clouds clear thinking and increases anxiety (preparing your body for fight or flight response, when in reality, there is no one to fight or run away from). Fortunately, human brains are also capable of storing historical experiences and taking comfort from them. We are exactly going to do that today to seek answers to the relevant questions like how much more can the markets correct; should one deploy more money or should one run away to safety?
What led to such sharp correction?
If we look at our market history, majority of 15-25% corrections have been accompanied by tangible local or global reasons –Taper Tantrum (2013), Demonetization & Trump (2016), IL&FS bond crisis (2018), and Ukraine war (2022). On the face of it, the current market correction does not have a strong identifiable reason – one can argue that FII selling intensified with Chinese stimulus in Oct’24 and Trump victory in Nov’24. At the same time, India’s economic growth slowed down due to high base, tightening of financial sector by RBI, and & slowness in government spending.
While these are legitimate reasons, they do not make a case for such a sharp fall, since the general macro set-up for India is still benign – corporate profits, balance sheets, banking system, inflation, current account, and fiscal balances were in pink of health (detailed in our previous memo). What then explains the ferocity of the correction? On scanning the history, one comes across some similarities between India’s current market decline and the flash crash in United States in 1987, where the markets corrected by 30% with no major identifiable reason. Post mortem of the 1987 crash in US revealed a few simple insights –
- Valuations had become very expensive due to 5 years of non-stop bull market in Dow Jones
- There was a huge build-up in the market due to introduction of program trading and entry of millions of first-time trades & investors.
- Such was the froth that it just needed some currency weakness for the market crash by 30%.
- Since there was no big fundamental reason for the crash, US markets recovered all the losses and made new highs in 20 months.
India markets have also been on a non-stop rally since the COVID lows and 12 of the 16 crore investors in India have entered the markets only after 2020. The increased intensity of option trading, margin trading, finfluencers, and social media fuelled story telling ensured perfect euphoria. A little bit of growth slowdown and currency depreciation has resulted in the 15-25% fall in India.
How much more correction is on the cards?
As per the chart experts we follow, the worst case is another 7-8% at the index level and 10-20% at the stock level. The base case is that we stabilize around current levels and go through a period of correction. Coming to the fundamental set-up of our market, it seems that large part of the correction is over. Further correction will need an external force – like one more round of currency depreciation, or panic amongst retail investors leading to SIP stoppage.
While markets may give some more pain, the optimist in me wants to remember that valuations in many pockets are no longer frothy; that the macro set-up of our country is still benign; that the Government & RBI are now working extra hard to ensure that our economic growth does not suffer; that India remains the world’s most attractive growth market thanks to its young population, spirit of entrepreneurship, rule of law, and large domestic economy; that every big correction in the past has been a buying opportunity and this time will be no different; that the FIIs who sold India over past 18 months to invest in cheaper markets like China & Europe, will someday return.
What should an investor do in such times?
Having lost everything to the game of dice, the Pandavas were depressed in their forest life. When Bhagwan Krishna met them for the first time, he gave them a simple advice to navigate through tough period – tour the country to review the existing alliances & forge new ones, sharpen your battle skills, and meditate on Lord Shiva. To me, this simple advice is as applicable for the stock market investor of today as it was applicable for the Pandavas some 5,000 years ago.
Re-visit your existing stocks & themes: The hot stocks of the past bull run were in sectors like defence, railways, industrials, power, government stocks, real estate, travel & tourism, jewellery, metals & mining, China + 1, electronic manufacturing, electric vehicles, electricity, solar & wind energy, SME, etc!
- Themes that have slowed: Due to a combination of local & global factors, sectors like railways, government companies, factory efficiency, solar & wind, SME will witness slower growth. If you are over-exposed to them, it may be prudent to reduce the exposure.
- Themes that are on high base: Themes like luxury articles, premium housing, jewellery, fashion, travel & tourism are great long-term themes but they are sitting on high base of past two years. An investor must be stock specific in these sectors.
- Themes that are alive: Themes like electricity, electronic manufacturing, metals & mining, energy efficiency & sufficiency continue to remain attractive growth stories. The correction can be used to increase exposure to these pockets.
Scan for new opportunities: Every change in macro set-up brings in new opportunities as well. Among the beaten down sectors, opportunities are emerging in banking, insurance, and discretionary consumer space. The policies of US and China are literally changing the global world order. No country can live under the assurance that globalization will remain the way it was over the last 40 years. Every country will have to develop its defence, technology, and energy sectors to reduce the reliance on the global biggies.
India can never forget that SHELL OIL refused to provide fuel to the Indian army during the Indo-Pak war of 1971, that US tech giant refused to share the maps of Kargil during the 1998. India’s spending on developing the energy, electronics, defence, and technology sectors will continue for decades and this presents the best long-term investing opportunity.
Sharpen your investing skills: Use this turmoil to re-visit your risk tolerance & future goals and see if your asset allocation is aligned to that. If you are over-exposed to stocks, you should correct that whenever the market recovers (no point of panicking and selling at these levels). In case you are under-exposed, this could well be your chance to increase the allocation. Money invested at current levels will have very high probability of delivering good returns if your horizon is 2 to 3 years.
In the end, do not judge equity investing with a lens of the past 4 months or the previous 18 months. If you get more than deserved upside, you must live with some amounts of downside as well. There is no escaping this.
Trivia – AI and spirituality!
The corporate world is abuzz with discussions on Factory Automation and Artificial Intelligence – most corporate owners are excited about the efficiency gains but most policy planners and employees are scared about the impact it may have on entry level white collared jobs! In the meantime, we met some of our friends who are small factory owners, and they were not talking about job losses. Rather, they were on a break since most of their labour, transporter and vendors had gone to take the holy dip at the Maha Kumbh. And many were worried that there is so much development happening in UP & Bihar that some of the labour may not come back!
It got me thinking about how important & powerful is the spiritual aspect in India. The Maha Kumbh attracted over 60cr devotees, created 12 lac temporary jobs, and generated almost 3 lac cr in revenue! Consulting agencies now predict that tourism has the potential to create 2.4cr new direct & indirect jobs in the next 10 years (this is more than the jobs created in IT & Banking over 35 years).
Nehru once equated Indian spirituality with superstition and said that we must give it up and only focus on western science. But the Ram Temple and Maha Kumbh experience shows that the modern India is giving up its colonial mindset, becoming prouder of its civilizational identity, and wants to blend in science with spirituality. And as far a job market in India is concerned, spirituality can give back what science & technology can take away!
India’s tourism sector contributes to only 5% of our GDP (Thailand is 7%, Portugal is 12%) despite having the best mountain ranges, the densest river network, the biggest evergreen forests, and a long coastline, and 5000 years of civilizational history. But this is set for a change. In the coming decades, our tourism sector will see an upgrade at all levels – hotels, trains, airlines, airports, tempo travellers, taxi services, food & sanitation, etc – and provide opportunities to investors, entrepreneurs, and ordinary citizens.