While all Global and Local indicators are signaling a recession in sight, is it the time to ‘Sell’, ‘Hold on’ OR ‘Invest more’ is the burning question in every investor’s mind. Indian stock markets’ major indices have been constantly crashing recently and BSE Sensex lost over 3,500 points in last 3 months from its lifetime high of over 40,000 achieved in 1st week of June’2019. While the Sensex and Nifty have only started falling from last 3 months, the small and midcap index were beaten down heavily during whole of 2018 until today. BSE mid cap index which touched the high of 18,000 points in Jan’2018 is now hovering at 13,000 levels and thus loosing over 25% from its peak. The small cap shares have suffered the most as the BSE small cap index has lost over 35% from its peak recorded in Jan’18.
In short, the market is in complete panic which could easily be attributed to the following major factors noticed in past 1-1/2 years:-
- Corporate governance and Debt burden issues (Company Specific) noticed in many mid-cap and small cap Companies, where Management presented wrong financials and siphoned out a significant amount of funds to the other Companies under their ownership. Many of the likes of renowned names like Yes Bank, DHFL, CG Power, Coffee Day Enterprises (CCD), PC Jewelers, Jet Airways ADAG’s group Companies took a harsh beating where the value of shares were lost in the range of 75-90% from their highs. As one can notice, these are not industry specific cases but the substandard Management and huge interest burden caused the suffering.
- Slowing Demand (Industry and Country wide) has been another big concern for many industries specially auto industry and reality sector where the falling revenues have greatly affected the stock prices negatively. Overall breadth of manufacturing sector is negative as PMI data of August’19 suggests the lowest growth in 15 months. GDP growth has also slipped below the long term trend of 6.6% in last two consecutive quarters. Quite a no. of big companies has announced the job cuts to control cost and maintain tighter margins which are affecting their overall profits.
- Unfavorable Tax Policies by Government: Whether it was the implementation of long term capital gain on equities or recently implemented (and later on reversed) enhanced surcharge on FPIs (Foreign Portfolio Investors), it only resulted into further dampening the sentiments of market.
In addition to all above, some of the Global indicators are indicating at another worldwide recession. Be it the inverted yield curves of US Fed securities, US-China trade tussles OR the Market Cap to GDP ratio (popularly known as Buffett Indicator).
In spite of the bleak picture above points suggest, we can still be hopeful as:
- GDP is still growing: It is not a recession still, only that the growth of GDP has slowed down.
- Government is taking constant measures to boost economy: A stable Government with positive attitude would definitely help India to recover quickly from this negative phase. Recently proposed merger of nationalized banks, increase of foreign investment limits in sectors like Media and coal mining while easing FDI norms for single retail branding, reversal of enhanced surcharge on FPIs suggests that Government is taking series of steps towards their target of a 5 trillion USD Indian Economy by 2025. Some of us may think that the measures are insufficient but we can safely say that we are on right path, even though progressing slowly.
- Demographics of India are still favorable: India’s work force is still expanding and a positive growth rate of population would continue to push demand in future.
So, coming back to the critical point … What should an investor do at this stage?
- Short term investors who are looking to recover their capital and profits in next 2-3 years should try to stay away for now until the uncertainties settles down and a clear uptrend is visible in Indian Stock Market;
- Long term investors with a view of 10 years or more should continue to invest gradually without fear (and try to take advantage of these lower prices) as long term growth story of India would remain intact and the market is expected to even out these ups and downs in long run;
- People with less expertise should rely on Mutual Funds for a well-balanced investment approach;
- People with good hands on expertise of the market can invest directly in the stocks of Companies which are
- Having less or no debts;
- Not having Corporate Governance issues and run by professionals (rather than being family owned businesses) ;
- Not industry/sector specific (big conglomerates with diversified businesses);
- Heavily beaten down by this market downtrend while having no flaws in the Management and still reporting stronger earnings and growth every quarter;
- Don’t sell in panic unnecessarily and maintain your investment in good stocks and mutual funds.
We should never forget the two principals of the Ace Investor – ‘Warren Buffett’
“Be fearful when others are greedy and be greedy when others are fearful”
“Opportunities come infrequently. When it rains Gold, put out the bucket, not the thimble”
Disclaimer: The views and tips expressed above by the writer are of his own and not that of the website or its management. Online CFO advises users to check with certified experts before taking any investment decisions.
Siddharth qualified Chartered Accountancy in year 2003 and is working as CFO currently.