Dalal Street was today witness to heart-wrenching scenes as the punters wailed openly about their colossal losses. They had given up the fight. They knew that they could not win. The relentless selling over the past few weeks had not depleted their pockets but had also broken their soul.
Some Gurus made a valiant effort to keep the spirits up. Porinju Veliyath, as usual, was trying to lighten the mood and drum up confidence. “WOW, Nifty at new low! doesn’t mean anything technically & doesn’t change anything fundamentally for India; still worth Picking Stocks!”
WOW, Nifty at new low! doesn't mean anything technically & doesn't change anything fundamentally for India; still worth Picking Stocks!
— Porinju Veliyath (@porinju) February 10, 2016
However, there was not much of an enthusiastic response from his followers because most of Porinju’s favourite stocks were being clobbered out of their senses. Arvind Infra, his favourite realty stock, hit the lower circuit by slipping 10%.
The other Gurus wisely kept a low profile knowing that discretion is the better part of valour.
Saurabh Mukherjea was the only Guru standing tall. His prediction that the Sensex would slip to 22,000 is playing out as per script. It is now within touching distance of that target. Lets’ listen to his latest prognosis of the situation:
Earnings Growth is still elusive:
The perception that India is a beneficiary of the crash in commodity prices is very hard to validate because in the past six quarters, Nifty earnings and revenues have not gone anywhere.
The GDP data does not sort of make sense and the earnings data is not there. There is no earnings growth to talk about for the last year-and-a-half.
Global equities are looking into the abyss, more pain is to come:
If I look at the global situation, my reckoning is there is more pain to come. Last I looked at MSCI EM, it was roughly down 37-38 per cent. In most of the historic selloffs, MSCI EM has fallen 50 per cent. So there is very little reason to believe that somehow emerging markets have bottomed out and if you look at the selloff in global banks, the share prices of European and Japanese banks are now beginning to factor in deflation in the rich world countries. If we get into a deflationary scenario, i.e., prices in the real economy start falling in the developed markets, then that is when the real carnage will take place in global equities.
Historically, the big bear markets in equities across the world have come in deflation conditions and with the Japanese 10-year bonds now yielding negative interest rates, we are now entering a situation when global equities have started looking into the abyss. So I would stick to the point of view that I articulated eight-nine months ago that 22,000 Sensex is when we start making a rational call that the Sensex is cheap. I do not think the market overall is cheap. I do not think emerging markets have bottomed out and while I am not an expert on market outside, my reading of the global situation is, leave aside our country, there is more pain for equities across the world yet to come.
Even Sensex 22000 may not be the bottom if commodity prices cracks further and liquidity dries up:
There are two points which worry me. So while I will stick to the point of view that at 22000, the Sensex will generally become quite attractive to look at, there are two things which worry me — commodities and liquidity. So if you look at the commodities point first, I think you guys began by asking me about the commodity situation. It is obviously a global situation but the problem is that it has a big bearing on earnings in our stock market as well as our banking system. So if metals and oil keep coming off, it will lead to further stress over and above what is already being anticipated in Q4. It will lead to more stress in the next fiscal and beyond a point, the banking system will simply not be able to deal with that level of commodity stress.
Another complication is liquidity. Liquidity — both global and domestic — is a function of confidence. If you and I become apprehensive about circumstances, our willingness to trade, to invest, to lend will reduce and that is how liquidity dries up. If liquidity dries up again, the financial system will be challenged which will then create ripples in the real economy. If corporates cannot borrow, they cannot run their day to day businesses. This circularity is very dangerous and I think this is where both the central bank and the government could do a lot to intervene to inject liquidity aggressively into the Indian market much as the RBI did in October-November 2008. Let us hope in the budget or perhaps even before the budget, we get a major announcement on PSU bank recap. I know Indradhanush was announced back in August but four-year spread clearly is not enough. There is more money required to recap the PSU banks and the government needs to give clarity to the market as to how the PSU banks will pull through the relentless credit quality deterioration that they are seeing. So that is where I have an element of concern. Globally and in India, the spiral of commodities conking off, liquidity coking off could end up becoming quite serious unless our authorities intervene.
Better to sit on cash and stay out until there is stability:
If you have some burning compulsion to invest in equities by all means, let us talk about stock selection here and I will do so in a minute. But if you do not have some raging compulsion to speculate in the market, you are a high net worth individual and you can pick and choose your moments of entry, then wait a while longer. We will see more pain in the global financial system and I think we will see more pain in our Indian financial system before the bottom arise.
If you have a compulsion to buy, buy only well run companies with strong balance sheets and good cash flows:
Now if you either absolutely need to be invested in equities or you have a penchant for speculation, then look at well run companies. There are well run companies in our country with strong balance sheets, good cash flows. Some of them have come off quite sharply and some have come off less. Take something like TVS Motors, my consistent view is that this is a well run company with a good balance sheet, steady market share gains, a slew of product launches coming. I reckon in over the next 2-4 years, TVS will pull away market share from Hero and Bajaj. I think you can buy that at 15 or 16 forward earnings now. So there is room for stock selection but it is a tough task. We have got 25 analysts in Ambit and we have been straining every sinew to find good stock selection opportunities. If you do not have these sort of resources, you may just want to stay and watch the carnage and wait for better entry points.
Avoid Banking & Financial Stocks (especially PSUs), commodities, metals & mining stocks; only look at Auto, Pharma, FMCG & Consumer goods stocks:
BFSI is a very tricky place to be invested in today. The PSU banks are facing relentless credit quality deterioration. Even the private sector banks are facing trouble. I think there is pain in credit quality to come. My reckoning is SME credit quality is cracking and private sector banks have large exposure in SME credit. Amongst the large NBFCs, we have already seen at least two of the large NBFCs, post steady deterioration in numbers over the last four quarters so even the NBFC sector I do not think will be immune from it. BFSI is a big sector, a third of our market is BFSI. I think it will take a lot to convince me that BFSI is a place to invest in. The second is commodities, I think as I said it is a global spiral, it is not evident that Chinese demand for commodities is coming back. It is not evident that the excess supplies situation in oil is suddenly going to cure itself and hence commodity stocks in our country will remain challenged which in turn will adversely affect the banking system. The third is industrials. Of the large industrial companies, I should stay clear of L&T until valuations become way more attractive. So these are the three areas. If I add these three sectors up; industrials, BFSI and commodities, metals, mining related plays, we are looking at close to 50-60 per cent of the stock market which I think is a difficult place to invest in. That leaves for you around 40-50 per cent of the market.
Saurabh made several other interesting and relevant points in his interview. Click here to read the entire interview in ET