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

– Seth Klarman

A collection of dark clouds on the horizon

The new year continues to bring bad news to the market. A combination of news that are pressuring the markets can be termed as a collection of dark clouds.

Cloud 1: Tepid corporate earnings for FY25, a continuing feature across most companies is exposing the overvaluation in the market leading to significant de-rating adjusting to lower growth rates in the coming quarters

Cloud 2: Slowing demand after record years of growth in FY23 and FY24, as most economic cycles are naturally amenable for slowdown the general election and major states election has also ensured government spending to reduce sharply leading to secondary impact on company toplines and gradual slowing of new infrastructure projects awards

Cloud 3: FPI selling, a big sentiment changer for the stock markets even if they are now much lower in exposure as a percentage of ownership in Indian equites. Mutual fund have emerged as large players in the domestic equity markets but the significant sell off by foreign funds weigh inordinately on the market sentiment

Cloud 4: Global uncertainties, the inauguration of the 47th President of the United States and a flurry of executive orders unleashed on day one has spooked markets into believing that trade and immigration will overwhelm the narrative leading to higher barriers and inflation for most trading partners again unsettling equity markets and allowing bond yields to rise

Cloud 5: Rupee weakness and the rise in the trade deficit. As trade data weakens the resultant drop in the value of the Rupee vis-à-vis the USD has increased the prospect of imported inflation and rise in raw material prices increasing input costs. India remains a very large importer of crude and a steady decline in the currency points to increasing deficit funding and a hardening of interest rates

Cloud 6: Skittish investor sentiment. As most recent investors in the Indian stock markets have never seen a real bear market we have seen knee-jerk reactions in closure of SIPs in mutual funds, gradual fatigue in the F&O markets and a general loss of confidence in the retail market. This may not be a fundamental factor for longer term investors but in the short term leads to weakness in stock process, especially in the mid and small cap stocks, happy hunting ground for these investors

Cloud 7: An IPO boom. Many new initial public offerings and huge supply of new paper reduces demand for public equities, a simple demand and supply situation

What should investors do, is there hope on the horizon? A typical investor story…

Add a flash of lightning!

With the gathering of such clouds, it will be but natural that a few lighting flashes signal the onset of a perfect storm. These could be in the form of budget announcements perceived negatively by the markets or disappointments in tax reform etc., continuing weak numbers on corporate earnings, significantly higher inflation than expected and an increase in FPI selling in the short term in search of safer asset classes by global investors.

That in short describes the title of this piece “Gloom and Doom”. With every period of euphoria, a period of consolidation begins. Investors take bold allocative calls and increase their exposure to equities in such a period after significant gains. They subscribe to the “long term” story and are comforted with the facts and figures that prove such bravery results in achieving of strong returns over the long term

However, after such a period of gently reducing levels in the market once it enters a markedly definitive downturn, doubts creep in and most are induced to cut exposure, or worse come out of the market completely. Continuing drops in the market levels “prove” their hypothesis and they feel happy to have secured a relatively lesser loss and re-allocate the sum to no-risk assets or worse, to bank deposits.

After a considerable period of non-activity as the market inevitably starts its rise, they initially discount the move thinking this is a dead cat bounce, or a false dawn, feel increasingly nervous at the gradual increase as the rise now goes beyond their exit point, deciding to never “dabble” in the market locking in sub-standard returns for the period they invested and settle for lower return products assuring a “safety” but never able to achieve the goal of financial independence based on the India growth story.

The savvy investor on the other hand did not see the news, was not bothered of the day-to-day NAVs and stayed blissfully invested in well managed diversified mutual funds for the next 7-10 years. He had a happy outcome.

But the question is…

What describes you as an investor?

“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

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