Buy fear and sell greed
Buy fear and sell greed
The Indian financial markets are going through a rough phase. After touching highs of 12k on nifty on 3rd June, it has seen a drastic fall. Markets are feeling major concerns as a slowdown in the economy. Budgetary proposals have initiated a correction in the market wherein major of FPIs have started taking out liquidity from the Indian equity market because of new tax implications proposed in budget 2019-20. Domestic institutions have also become cautious in approach because of the macro and micro economy factor.
What is going wrong?
Trade War between China & the United States
The trade negotiation between china & USA is getting ugly day by day. President Trump said he would slap a 10 percent tariff on the remaining $300 billion of Chinese imports starting September 1st. Now, this uncertainty and concerns about trade policies making entire world markets jittery. Asian & Indian markets are also affecting largely because of it. Major investors are looking for safe havens for investments till the time the world economy is getting settled with clarity on each aspect of future trade policies.
A bad state of macroeconomics
Subdued Q1 GDP data shows that the growth rate is going down on a continuous basis. Q1 data shows the GDP growth rate at 5%, which creates panic in the Indian financial market of a slowdown in the economy. The lower-than-expected GDP print indicated that the slowdown is more persistent, underscoring the need for coordinated monetary and fiscal policy actions. After taking so much action on the fiscal aspect by Finance minister Ms. Nirmala Sitharaman, still, markets are worried about the real face of the economy. Markets are still analyzing data & steps taken by the finance ministry for creating confidence in investors.
Fall in core sectors
The data published earlier this month shows eight core sector industry growths has fallen to 2.1% in the month of July, which is worrisome. It also indicates that the Indian economy is going through a slowdown. Country’s manufacturing sector activity is 15 month low. August Auto sector sales data shows a continuous fall in auto sales numbers. Largest car manufacturer Maruti Suzuki delivered a 33% fall in sales wherein others also in line with Maruti. Tata Motors has shown de-growth of 45%, Hyundai has shown de-growth of 16% & Hero Moto corp has shown a de-growth of 20%.
Weakening rupee & FII outflow
From the bottom of the august month, the rupee has fallen very aggressively. From 69.50 in august 2019 to highs of 72.36 today, the rupee has taken a sharp curve and we believe it may touch new highs of 73.50 to 74rupees against the dollar by next month-end. Weakening rupee is also a disaster for Indian import bill and fiscal deficit. Falling macroeconomics data, the sustained outflow from FPIs will lead to more weakness in rupee. Foreign investors sold stocks worth of Rs 5,920 crore in the domestic market in August even after the government rolled back increased tax surcharge on FPIs.
Fiscal Deficit & Government Spending
The fiscal deficit of the central government increased by 1.4% to Rs 5.47 crore in April-July 2019-20. The fiscal deficit as a percentage of full-year estimates stood at 77.8% in April-July 2019-20 compared with 86.5% touched in the corresponding period of last year. The most recent goods and services tax (GST) collections data is also an indication of weak domestic demand, though the fact that indirect tax collection is growing slower than nominal GDP growth could also mean that demand that shifted to the formal sector after demonetization is again moving back to the informal sector. The government spending in key sectors gathered pace in the month of July. The increased spending comes as the Indian government pushes measures to address the slowdown concerns in the economy and enhance liquidity in the system. The indication that dues towards the private sector may have already begun to be settled, revenue expenditure rose to 34 percent of budget estimate in April-July 2019 from 27 percent in April-June 2019. The spending in the roads sector improved multifold with the total spending now 39 percent of the budget estimate from 1 percent of the budget estimate until June 2019 suggesting that dues towards road sector contractors may have already begun to be settled.
The fiscal deficit funding data shows that the government has been using small savings fund to a large extent to bridge the deficit in the absence of robust revenue receipts. But in our view, this will gradually change, as on August 26th RBI has given a dividend bonanza of 1.76L Cr to the Indian government. This less expected receipt will help the government in continuous spending towards infrastructure projects, etc and this will help in bridging the gap between expenditure and revenue for the government and will also help in keeping fiscal deficit in control.
Consumption & Savings
We as an Indian always respected savings over consumption but from the last few quarters data shows a negative growth in saving rate which gone down from 23% to 17%. It means there is no growth happening in income but majorly individuals are cutting on savings and diverting that savings ratio towards spending. It is also a dangerous indication as it is not long term measure and off let it will suffocate individuals which will lead to alteration in consumptions. If income is growing and then consumption is growing then it will help in GDP growth but adversity may lead to lesser demand and blurred future outlook for suffering industries like autos, consumer durables. The lower Inflation rate is still supporting this pattern but it will definitely hamper in the later stage. It will lead to less credit take off as demand will further squeeze. And if Credit takes off for the industry will go down then it may lead to lesser production then capacity which means more unemployment and more shutdowns.
What to do in the current scenario?
There is a famous saying “Buy fear and sell greed “, But eventually major of investors are not able to implement this because pessimism in the market can shake an individual’s confidence. Where is the bottom, nobody knows and where is an upper limit that also nobody knows. Markets perform on a few factors which are liquidity, earnings, Macroeconomics and risk-taking capacity of investors. But a bear bug can affect all of them.
A slowdown in the economy will lead to so many things, like higher unemployment, lesser demand, lesser government spending, lesser credit take off, etc. But when there is pessimism in the market than ideally, it is an opportunity for smart investors because smart investors will always buy a risk-reward ratio. Now defining, the risk-reward ratio depends on the individual. For e.g. it may be the bottom for one person but for another person, it may go further down. A systematic investment pattern can help you in buying value.
Economy and market are cyclic in nature. What goes down will definitely come up and what goes up will defiantly come down. For e.g. Gold was in bear phase from last 8 years wherein per 10gm was 31k in 2012 and it was nearby at the same level till Dec 2018 but since then gold has taken a sharp upward move and on 3rd Sept price is 40k per 10gm (24ct ). Sensex has created a peak in Jan 2008 of 20,686 and fall to the level of 8966 in the month of Feb. 2009 which was almost a correction of 56% but markets have taken a u-turn and again touched the top of Jan 2008 in month Oct 2010 again.
The cyclic and uncertain nature of markets makes, lucrative for higher returns. If markets move in a single direction than no investor will invest in these markets. Uncertainty and unpredictability are the intrinsic nature of stock markets.
Best of asset allocation and risk management can create higher alpha in an individual’s portfolio returns and vis-à-vis it helps in minimizing downward negative returns. The systematic pattern of investment can help individuals in averaging their buying which leads to a better alpha on returns.
Fear is fair but too much fear will lead to ignoring opportunity available. The majority of the investors buy stocks or investment products one's stocks are on high or moderately high but he forgets to book profits and sell ones it takes a deep correction. Booking profit is also a strategy like asset allocation. Before investing always, keep a return expectation along with stop loss. If positive returns are for real, so are losses. Booking losses also help you in minimizing losses along finding and availing the new opportunity in time.
Nothing is permanent, so this phase of economy and markets will pass too. No one can predict when it is going to settle and take opposite direction but for sure day will come soon so as an individual, concentrate on the risk-reward ratio from the market and follow systematic investment pattern for better result.
Disclaimer: The author of this article is Mr. Rohit Khandelwal. He is an AMFI registered Mutual fund advisor. ARN Code is -121821. Mutual funds are subject to market risk. Kindly read scheme related documents carefully before investing. Moneymatters and Its employees or Directors don’t guarantee any fixed/assured return on any of the financial products. All returns Shown are tentative in nature. These are not guaranteed to anyone or investor in any nature.