First of all we have to introspect on why we ignored all the tell-tale signs that were flashing a warning that a storm is ahead.
A series of events such as the China slowdown, negative interest rates, growing dissatisfaction with NAMO etc should have put us on guard that trouble is brewing in the World.
We also ought to have paid more attention to the grievances voiced by enlightened personalities like Narayana Murthy, Deepak Parekh, Amartya Sen etc that there is a governance problem in the Country. Such personalities do not openly voice their dissatisfaction unless things have reached a head.
In hindsight, we ought to have erred on the side of caution and taken some money off the table.
Anyway, there is no point in crying over split milk. We are now in the position where the crash has thrown up a number of attractive opportunities. We have to shake ourselves out of the shell-shocked state and start foraging for diamonds in the ruins.
But for that, we must first be sure that we have reached some sort of the bottom in the Bear market so that we are not once again caught unawares like a deer in headlights.
Saurabh Mukherjea has in a succinct manner identified three circumstances which will tell us when a bottom is in place:
(i) Improvement in liquidity in the banking system:
Presently, liquidity has dried up in the banking system. This is shown by the fact that commercial paper (CP) rates have rocketed from 7 percent to 9 percent. An improvement in liquidity in the banking system will be seen by the softening of 3-month CP rates.
(ii) Recapitalization of PSU Banks:
The Government has already announced a banking recapitalization of USD 10 billion in August 2015. However, this is inadequate. The Government will have to announce a revised plan for recapitalization either in the Budget or elsewhere. Raghuram Rajan, RBI’s Governor, has already adverted to the urgent need for this.
(iii) Increase in Consumer Price Inflation (CPI) in USA, Europe & Japan:
If the inflation numbers remain weak, it means that there are deflationary conditions prevalent in the Western and Japanese economy. Price deflation will put pressure on the banking system in the West and Japan. This will signify trouble. All the great bear markets historically have come in deflationary circumstances.
Keep ears to the ground and be conservative:
Saurabh advised us to keep our ears to the ground and to pay attention to the three things listed above which will tell us whether we will limp back to normalcy or “fall into the abyss”.
Saurabh also advised that we have to be conservative and focus on “capital preservation”. He warned that we should no more than dip our toes in the water if we have to survive the crises and live to fight another day.
Keep a close eye on Banking & NBFC stocks:
Saurabh emphasized that the banking system is presently undergoing a grave crises of NPAs and that its survival is dependant on the measures that will be taken by the RBI and the Government. He referred to the speech of Rahguram Rajan who made it clear that there is a “lot of pain” left in the system. Saurabh, however, also made it clear that if the Government comes up with a “credible resolution” to cleanse and recapitalize the banking system, it would not only signify a bottom for the market but the entire BFSI sector “will look very tasty”.
Implicit in this advice is that we have to keep our eyes and ears tuned to the Government’s commentary on PSU Banks. PSU and private banks are likely to jump as soon as there is any positive news on this front and we must be there at the forefront to profit from the situation and recoup all of our losses!