We were surprised to receive mid-day phone calls from our relatives asking us “Is everything ok at your office? I hear that markets have crashed in a big way”. While the mid-day call wasn’t unusual, what surprised me was the pace of information dissemination in the “whatsapp era”. Our relatives work in IT, FMCG and non-market related sectors and their profession or daily routine has little to do with stock markets and yet the reverberations of stock market crash reached them almost immediately through their smart phone.
Tomorrow’s newspapers will be replete with reasons for the market crash, whatsapp groups will be active telling you how much money was lost by investors and news channels giving expert opinion on what to do in such volatile times. It’s easy get confused in the din of this information age. So this series of market view will focus on how an investor can benefit from such market situations.
What’s our market view?
The events of the past few months could rather be confusing for investors – markets are 15% lower from their February highs, quarterly results haven’t been great and on-ground business activity hasn’t picked up meaningfully. Where are the ‘aache din’ as promised by our Prime Minister and many other dignitaries?
There are multiple factors that affect the stock markets in the near term, but corporate earnings are the single most important driver in the long term. Let’s start by analyzing the short term – commodity prices have fallen significantly over the past six months, indicating weak global demand. Commodity exporters like Russia and Brazil witnessed significant turbulence in their currencies and stock markets. Chinese economy too started showing signs of slowdown and their stock markets started collapsing. All of the world’s major investors are invested in China and losses here would mean significant hit on the P&L. A natural behavior during such times is to pull out money from other markets and shore up cash balances. As a result, most of the emerging market indices including India started falling.
Now let’s try to understand the positive long term implications of this on India – lower commodity prices help us to reduce our import bill and contain inflation. The saving will help the Government to spend more money on infrastructure and capex projects that will help revive the Indian economy. Also, margins of corporate that use oil & metals as inputs (tyres, cookers, pens, chairs, etc) should expand meaningfully and translate into better earnings.
Of course, there are some negative implications too – companies that are heavily dependent on exports to China, Russia, etc could suffer. Indian companies in iron & steel sector will see lower demand for their finished products and might default to the banking system. However, these companies form a smaller proportion of Indian economy and will not impact the overall growth prospects of India.
We believe that the current fall is a correction in a multi-year bull market and that more wealth will be created over the next five years. The same old rule of being stock specific continues to apply in the current context. Gold and real estate are showing signs of a multi-year slowdown, thus leaving stocks as the only avenue for earning high returns. Those who wish to start stock market investing in a systematic manner can write back to us.
Which sectors/ themes do we like?
Given the global turbulence, we will abstain from investing in the metals, upstream oil & gas and banking sector. In general, we would stay away from debt heavy companies in infrastructure space too. We remain excited about specific opportunities in engineering, auto ancillary, plywood manufacturing, pens & stationary, real estate development and SME lending. One can look to start buying slowly from tomorrow.
Trivia – Aspirational inflation
While we have discussed this in one of the earlier series, this topic warrants a second mention. We have all learnt about demand side and supply side inflation in our college days. But none of the teachers, books or courses taught us about aspirational inflation. It’s pretty simple to understand – our desire for better lifestyle, better gadgets, and better travel keeps on getting better with every passing year. A simple back-of-the envelope calculation suggests that inflation levels for our generation, more so for the ’empowered educated and working class’ is close to 25% and not the 9% that gets reported by the government.
Most of us are faced with a situation where salaries go up by 15% and expenses go up by 25% every year. So it becomes extremely important to earn an expense adjusted return of ~12-14% just to maintain your current financial position. Given that real estate and gold are in multi-year downturn, equities are the only place where you can do that. One can benefit from investing in businesses that benefit from aspirational inflation. Titan, Jockey and Cera are classic examples of such businesses. The aspirational Indian youth have thronged the stores to buy products of these companies irrespective of the prices. Rs. 1lac invested in these stocks would have yielded 40lacs, 27lacs and 36lacs over a 10 to 15 year time horizon.
While a lot of you would feel that equities are risky, just calculate your net worth (including gold, real estate and any possible inheritance) and see what proportion of your total net worth is in stocks. For most, this proportion won’t be more than 10% and you may still feel that your equity portfolio can make your financial health risky!
P.S: Equity as an asset class in extremely rewarding in the long term, however only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.