“The stock market is the story of cycles and of the human behavior that is responsible for overreactions in both directions.”

– Seth Klarman

Not been a good start to the year

As we begin the new year, we find ourselves staring at an erosion in market value across all our equity and equity-oriented portfolios, more in some equities than others. The market has also substantially corrected from the highs achieved in Aug-Sept last year. While it may be quick to jump to the conclusion that this is the much-expected correction that investors were waiting for to enter there is some reason to step back and assess the broad situation.

In out last newsletter we highlighted the danger of over valuation across a broad spectrum of the equity market here in India. However, we argued that there were other markets where the overvaluation was even more pronounced (e.g. US) that made us believe that it was a lesser risk to take. But markets have proved us wrong once again, as they usually do over shorter periods of time as they remain as unpredictable as the weather in a cricket match played in spring in England

What has prompted the markets to move so substantially down in the recent period?

Well, to begin with earnings have been tepid and as full year earnings are getting imputed, the previous two years of earnings growth looks far rosier than the current year. This in addition to significantly higher earnings multiples, it looks especially vulnerable to corrections. Global events such as a stronger dollar, weaker trade data and a prospect of a higher crude price is complicating the inflation and interest rate situation. Stronger employment data in the US has already given rise to a sharp market dip that indicates that the US Federal Reserve may not have much to give by way of lower interest rates. So is the case for a different reason in India. With higher crude prices and a weaker Rupee, chances of rates coming off in India are much in question and with a new governor at the helm, monetary policy yet remains very uncertain. With a prospect of harder interest rates, asset markets react with a decline

Equities in India were also enjoying a tailwind of new entrants to the stock market. The increase in stock broking accounts being opened and the “equity cult” appearing to have taken hold was causing a lot of froth in valuations. More patient investors via mutual funds began to view this growth in NAVs as given and have begun allocating significant amount of savings toward them via SIPs or systematic investment plans, bringing in substantial inflows to the equity markets and raising demand for the equity asset on a monthly basis. Record IPOs and their first day listing gains have further propelled investors into thinking that the equity markets go “only up”. While this may be correct in the very long run as data will support, for the market as a whole, in the short term, the story is quite different, and not necessarily for all individual stocks.

What’s the next pointer?

Can we expect some relief from the budget

The beleaguered investor is now looking for some respite from the hammering in the stock markets from the Union Budget. Much as we would like to share the sentiment, the hard truth is that the fiscal situation is a national priority and not a vehicle to assuage equity investors.

However, the Union Budget has recently become a medium via which the government does try and outline the direction of fiscal policy by way of statement and intent via changes in tax rules. If one were to make a wish list especially from the viewpoint of the investing public, it would appear something like this (please remember this is a wish list, not an expectation of what is likely to be announced in the Union Budget):

Short term measures to boost sentiment

1. Announce a reduction in tax burden on long term capital gains
2. Incentivize equity investors with tax benefits for holding for at least 3 years
3. Allow for lesser incidence of double taxation by rationalizing the STT and ST capital gains tax structures

Long term measures to boost market sentiment in markets

1. Announce significant incentives for new investment in capex (extend the COVID measures)
2. Ease foreign investment in the country via “one window” approval of FDI investments
3. Allow for deeper debt capital markets by increasing the number of foreign investors in domestic debt papers

A great opportunity to start investing

Serious investors and believers of the India story should rejoice that the market is now available at a discount to the previous levels and begin allocating. Investors who have begun recently and see losses in their portfolio should recall the behavioral pitfall of “myopic loss aversion” that accentuate recent losses allowing for the big picture of the longer term being obscured. Stay invested!

“Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market.”

– Warren Buffett

Mr. Tushar Pradhan
Chief Mentor – Investment Strategy, EPSILON MONEY INVESTMENT MANAGEMENT & Director – HXGON Partners LLP

Disclaimer-This newsletter is being curated by HXGON Partners LLP, a knowledge partner of Epsilon Money. This newsletter is not intended to be used as a recommendation and is generic in nature. Investors should follow the advice of a qualified investment advisor before making any investment decisions and should read all investment related documents and risk disclosures.
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