It has been a crunching fall on Dalal Street. And while the broad market was in a bear phase for almost a year, the last three months have seen price damage in the hallowed stocks—the Bajaj twins, the HDFC twins, Reliance, Titan, Havells. The list is actually pretty long.
The obvious question is what is leading to this decline and what should portfolio investors do. As a disclaimer, I have investments in midcap and multicap funds via systematic investment plans (SIPs) which I have not stopped and do not intend to.
There is just one set of data that I want to present here first.
From 12,088 closing levels on June 3, the Nifty has corrected to 10,862 as of Aug 5—exactly 10 percent. Is it really that bad? Well, let’s just go less than a year back in time. Between August-end 2018 and October 3, 2018, the Nifty fell from 11,738 to 10,030, a 14 percent correction.
Not just that, in that phase FIIs had withdrawn staggering Rs 39,000 crores. In this phase, FIIs have sold roughly Rs 25,000 crores. So what is making this fall look worse than the last one?
The answer to this question lies in what happened after that October bottom made in Nifty, which is the broader market underperformance.
From that low of 10,030 in October 2018, the Nifty rallied one way to 12,088 on June 3. Yes, in less than 8 months, the Nifty surged roughly 20 percent. That was a parabola.
But look at the chart the midcap Index followed. While the Nifty correction was 14 percent, the midcap Index fell a whopping 20 percent. And while the Nifty advanced 20 percent after that to a much bigger high, the midcap Index gained only 14 percent and made a lower high and after that started a one-way decline.
Yes, the Nifty fell 14 percent and had a 20 percent rally, while the Midcap index fell 20 percent and had a 14 percent rally. Trust me, these are big numbers when taken in totality and let’s not talk about price damage in individual stocks. In fact, over 50 percent of the broader market now trades at levels which are reminiscent of 9,000 on the Nifty and in certain cases like RBL Bank where we have seen a 40 percent collapse in a month, you will have to go a long way back in time to see where the Nifty was when stocks last traded at these levels.
But even this only tells you half of the story. The other half is in the data preceding this phase, essentially the post August 2013 phase when the Narendra Modi rally started. It was August of 2013 and it started to become clear that Modi was going to be the prime minister of the country and an economy struggling under “policy paralysis” and “corruption” and “NPA mess” and whatnot, the market saw a massive change in the undercurrent. What followed next was one of the biggest bull phases, especially in the broader market.
The midcap index was 7,000 then and in the next 5 years, it tripled to 21,000. Multibagger became a rage—heck when the Index itself gives you 3x returns, imagine what individual stocks would have done. In fact, over the last 6 years, the midcap Index is still giving you 100 percent returns.
That is where it all started to be too good to be true. There were bull market mistakes – from everyone: Promoters, mutual funds, rating agencies, companies and of course individual investors. Everyone assumed this phase is going to last forever. And then, the market started to see some red flags. It all started with IL&FS issue, which slowly spread itself into the entire NBFC sector. That squeezed financing of some of the growing sectors and slowly but surely the entire market started to feel the pinch.
Let’s just take one example to corroborate the point I am making, examples are many of course. Look at Ashok Leyland, now everyone is complaining about the stock’s fall from Rs 160 odd to Rs 60 odd in the last one year or so. But in 2003, the stock was at Rs 12. So in a six-year period, it still is a 5x bagger.
What perplexes me about the current decline is how everyone is blaming the government and budget for the decline in the market that we have seen. Did we credit the government when stocks rose 5x, 7x or 20x?
These are cycles. Every bear phase is followed by a bull market and in the case of India, perhaps a stronger bull market. The bull market will come, perhaps with a different set of leaders, but it will come for sure. The bigger question is not whether the bull market will come but whether you will be prepared to participate in that.
As the legendary economist John Maynard Keynes said:
The market can remain irrational longer than you can remain solvent.The market doesn’t give you brownie points for getting the bottom right. Also, it doesn’t distinguish between the first 500 point rally or the next 500 points. So the key in this phase is to stay systematic and not try to time the bottom.
First Published: IST