We are in a bear market. How do you deal with this kind of a bear market?
Undoubtedly we are in a market which is falling and the only thing which works in such a market is sticking to basics. This is the market where you do not run leveraged positions, you do not over trade, you try to maintain your asset allocation. When markets are falling, you do not get afraid of bad news and when the market bounces back, you do not get carried away by the bounce back. In a falling market, you try to catch a falling knife. In a rising market, you take some profit out. So, maintaining your asset allocation and sticking to basics will be the best option to make money in this market.
What is the best way to understand that markets which are always forward looking are discounting a lot of bad news? How does one figure that out? Inflation is a concern and the war is here to stayThe point is how much of the current inflationary scenario and a hard landing set up in the US is in the price?
There are a couple of ways and there is no one right way. One, from a fundamental point of view, if markets were trading above historical average valuations, bulk of the bad news is not yet priced in. The market is working on optimization. If you are at around historical average, you still know that some of the bad news is priced in but not all the bad news and when you start trading below historical average valuations, you know that bulk of the bad news is getting priced in. So, look at the valuations, not of the market but of your portfolio to figure out whether bad news is priced in or not.
The second thing is related to the flow behaviour. The retail HNI investors are running large leveraged positions. If the open interest is running very high, if you see high carry being offered for rollovers in F&O you know that people are optimistic and they have not yet factored in the bad news. On the other hand, when you find that carry is very low or negative and OI has come down dramatically, then you know that from a flow point of view, the market is very very light.
The third thing will also be investors’ behaviour. If all the headlines are showing that markets have corrected and one should stay away from the market by and large, you know that market has bottomed out and it has discounted all the bad news. When the consensus is for markets to fall or rise, the market invariably gives a surprise.
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So a combination of technical factors, fundamental factors and psychological factors put together can give you a sense about whether bad news is discounted or not. Will this help you time the market to the perfection capturing 18500 top and 15500 bottom? The answer is obviously no, you will get a sense of the direction not the magnitude.
With all of this gloom and doom bad news that is coming in, there is a change in leadership in sectors also. How are you preparing for the next bull run because that has to begin now? It is too late to start selling out. Is it too early to start buying?
One thing that stands out in my interaction with investors and distributors over the last couple of weeks is that investors’ confidence is far higher than fund managers’ confidence. Normally in a market like this, we will go and tell investors not to worry and keep faith on the long term India growth story. Now investors are passing us this message, markets are volatile but overall we will be fine.
This is a cause of worry as well as a sense of confidence. My feeling is that most retail and HNI investors are willing to take the volatility in stride. They have matured from their experience in 2000, 2008 as well as 2020 and clearly in the tug of war between domestic investors versus global investors, domestic investors remain fairly confident.
In this kind of environment, as fund managers, what do we do? We do not take a cash call because we are mandated to invest money to the market. Today I have divided markets in three buckets; one which is expensive where valuations are still above historical averages and either because of concentrated holding, low floating stock or for other reasons, the valuations are really sky high. We are completely avoiding that sector even though it can give us short term performance.
The other segment is stocks which are cheap. Some of them have done well because they were very very cheap and they have bounced back but we believe they are cheap over a longer period of time for a reason and they are unlikely to deliver performance.
We are focussed on the middle segment of the sector or portfolio where valuations are reasonable, businesses are not leveraged. In this kind of environment of rising interest rates, leverage can make an impact. We are not willing to pay PE ratio price to vision, we are happy to pay PE ratio for price to cash flow. So no leverage, no sky high valuations, good businesses, real businesses, solid businesses and there are ample opportunities available in the market. We are building that kind of portfolio.
One particular thing which we are watching carefully is whether our companies have the ability to pass the price rise. We are in an inflationary environment. There is a cost push and every company does not have the ability to pass the price rise. We are trying to build a portfolio of companies which can pass the price rise to consumers and maintain or improve margins..This is broadly what we have been doing over the last couple of months.
Have you figured out why the fund managers are more pessimistic than investors, this is your own observation?
Absolutely this is my own observation talking to thousands of investors and distributors over the last couple of weeks. The maturity shown by domestic investors this time is truly legendary and it is because of their flow and their commitment that markets are standing where they are today.
As a fund manager, do you worry that looking at all those headlines the retail participant may actually take a U-turn, I know they have not done so till now because all the data shared from AMFI does suggest that the inflows are sticking by, but given the kind of sharp slide and the kind of pain that the retail janta has actually faced, does it ever fear that the DIIs support on which the market is actually pinning itself on that could turn around?
Undoubtedly the worry always remains and that is why we depend on media to convey the message to the investors. In March ’20, a lot of investors saw that their SIP returns came down dramatically. Three-year SIP returns were negative, five-year SIP returns were lower than savings account returns and ten-year SIP returns were lower than FD returns. That pain was visible but at that point of time media kept on communicating to investors not to get worried, not to get perturbed by this sharp correction in the market and to continue SIPs.
By the time the markets recovered, they could see that the returns were back into double digit. Today despite correction in market, the SIP returns are still in high single digit to double digit. The March 2020 experience has taught investors to continue investing in SIPs without looking at the return and in case returns are lower or negative, one should actually do SIP top-up.
That experience and the education imparted over so many years has convinced retail investors to stay invested, ignore short-term volatility and my feeling is that this time domestic investors will continue to use correction as an opportunity to invest.
I firmly feel that the cycles are getting much shorter and sharper. It is technology, connectivity, awareness, movement of money. All of us are now experts in crude oil. I track the wheat prices every day, I have a comment to make on 10-year paper which I have never done for the longest time. I have even started tracking the US 10-year paper these days. Where have you picked up expertise in the last six months?
Well I was never an expert on geopolitics especially on Eastern Europe and Russia. Now unfortunately, we have to study that portion quite nicely. Second, we have also started looking at a variety of data. Earlier talking about US treasury and dot chart of Fed Reserve was enough but now days investors track that and so we have to track many more things to sound knowledgeable. But the real challenge we hear is that there is too much noise and that is misdirecting people.
When we were talking with so many brokerages, 90% of their investors who have opened demat accounts between March ’20 to 2021 end or beginning of 2022, have actually lost money. In a market which has gone from 7500 to 15,500, 90% of traders/new account openers have lost money. They were carried away by noise. They were carried away by momentum and ended up losing money.
On the other hand, for people who have been investors in mutual funds, their one-year return might have been negative, but there is a far better chance that they will make money by staying invested rather than trading. That realization is up among investors, traders and so we are seeing an increase in SIP flow not only in terms of amount but also in terms of number of investors every month.
Cut the noise, ignorance is bliss and I completely agree with you there. Having said that, even in all these negative news there is some silver lining. You said recently that one is seeing a fall in bad loans. There has been a considerable cool off in soft commodities or agri commodities from the Russia-Ukraine war time.
So barring crude, all other factors seem to be reasonably in favor of India. If crude moves from triple digit to double digit, then undoubtably Indian economy will benefit and all the headwinds which we are seeing will suddenly get converted into tailwind.
We need a little bit of luck on crude prices and thereafter my feeling is that our economy is in a reasonably good shape. FDI flows have trebled over 2014 level. Economic activities are firmly above pre-pandemic level. Capacity utilization is now reaching 70%. Inflation is high no doubt but that is mainly driven by food and fuel. Food prices have started correcting. If fuel prices correct, inflation will again be below RBI’s target level.
The base effect of inflation next year will ensure that inflation continues to remain below RBI’s target level. The FDI flows have remained strong. Monsoon is expected to be normal. Put all these things together movement oil prices, energy prices start coming down, economy will look in a far better shape.