Memo 28 – Market View: And we all Fall Down!

“You can either have good news or good price, but you can rarely get both”

There is lot of bad news around the stock markets & the economy. However, this can itself create some good news – that you can go out and get a large discount on practically anything – stocks, bonds, homes, offices, cars, bikes, clothes, etc.

Economic slowdown – Fifteen months and still counting

It’s been fifteen long months since the economic slowdown started and it has only intensified across sectors – electricity, real estate, cars, bikes, trucks, etc. As of now, it looks like an unwanted guest that will stay for few more quarters.

What caused the slowdown? Confluence of multiple reforms like demonetization, GST, stronger compliances impacted the old economy companies & old ways of doing business. Most of them had loans from banks & NBFCs and started defaulting. This in-turn started having a spiral impact on India’s financial system, which was anyways reeling under NPA problems. No economy can perform when its financial system isn’t ready to lend.

How long will the slowdown last? This turbulent phase is turning out to be so long drawn that many iconic companies & brands like Yes Bank, DHFL, Reliance Capital, Sintex, Eveready, CCD, Zee, Emami, Crompton, Vodafone, Idea, Karvy, Talwalkars, etc have fallen from grace. Not that they were the best managed companies, but these were well known consumer brands. Time & government are the best healers for any financial system when trust deficit is high. While the government is trying multiple things, it’s rather slow and will take a few quarters before things normalize.

Stock market slowdown – Two years and counting

Struggle for most: It’s been almost two years that stock markets have been struggling. Most investors have experienced negative returns over this period. NIFTY & SENSEX, the index of top 50 companies, however, do not reflect this pain. This is because few large companies have been able to do well despite slowdown and their stock prices have done well. Such a narrow market is a sign of the low trust that investors have on the broad economy and smaller companies.

Are there any green shoots? The slowdown doesn’t impact everyone in the same manner. Most well run companies are still showing decent growth by gaining market share from the weak players. For example, DMART is doing well but Future Group is struggling; Tanishq is doing well but majority of jewellery industry is struggling; Indigo is doing well but other airlines are struggling; CERA is fine but its competitors are under severe stress. These trends represent opportunity for investors.

What can you do?

Prices are attractive, be ready for shopping: When there is slowdown, no one wants to buy anything. Hence, the prices across asset classes become attractive. There are some government bonds that will yield 7% post-tax; some corporate bonds & debt mutual funds that will yield you 11%; lot of stocks that offer 12-15% growth opportunity. But all of this will require a long holding period as we wade through next few months of slow economy.

Have a systematic plan: We all make mistakes in good times but slowdown is usually the time to introspect and improve over our past mistakes. For some the mistake could be over-allocation to stocks; for others, it could be under-allocation. Some may have parked lot of money in “not a well run bank”; some may be paying heavy interest rate on home loan. Whatever the mistakes are, this slowdown offers an opportunity to relook and re-allocate.

Trivia: Money & mental health

There is little doubt that money cannot buy happiness & peace. But loss of it can surely bring a lot of turmoil in our life. Since it’s a season of “fall”, we are sharing few stories where these unfortunate things have happened. It teaches us the same old lesson of “not putting all the eggs in one basket”.

Story 1: Since the past 13 years, Keshav worked in a well reputed broking company in Mumbai. Over these years, the broking company diversified into many other financial services business and grew 10x in size. Not only did he make a good career, but he also made good wealth – a healthy salary, assured bonuses and generous ESOP program. The share price increased 6x over 2015-18 and Keshav’s ESOP value alone surged to Rs. 2 crores. He got so confident on his company’s success that he started investing a large part of his savings into company’s bonds (offering 9-10% interest). All looked good until Sep, 2018.

This company suffered so much in the slow economic environment that its share price fell by 70% and has retrenched 30% of its employees including Keshav. To add salt to the wounds, Keshav is worried that his “fixed income” investments in the company’s bonds may also go bad. Keshav was already thinking of retiring at age of 40. Unfortunately, he is now looking out for job and anxious about the erosion in his wealth.

Story 2: Sandhya, a mother of two, had always been a happy home maker. Fortune wasn’t kind on her personal life and she had to separate from her spouse. The only silver lining was that she got 50lacs as maintenance amount as a part of the separation. Having no experience in handling finances, she approached her family for advice and invested all the money in bank fixed deposits instead of spreading it out in other low risk instruments.

While bank FDs are always assumed to be safe, Sandhya’s misfortune was that the bank wasn’t safe. Half of her money was parked in a cooperative bank, which just went bankrupt. The only reason she parked money in that bank was because it was close to her house. While she realises that the bank is in trouble, she doesn’t have an idea of the long battle ahead for getting back her own money.

Feel free to reach out in case you need professional help with your investments!

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.

Names of individuals mentioned above have been changed to protect their real identities