The great undoing – did we predict it?

As I have been restricted to the confines of my home due to COVID-19 restrictions, I got some time to revisit some of the statements I made in the previous 2 newsletters.

Two statements clearly stood out from my Jan 2020 newsletter titled “Liquidity bubble and pockets of value”

“Welcome to the new year. 2019 has been a year of large-cap and ‘quality’ but a forgettable year from an economic growth perspective and broader market sentiment. Looking at some high-priced stocks reminds me of my childhood playtime with soap bubbles which I used to blow out of a circular plastic wand. All of these bubbles popped either by touching or by falling to the ground. I have articulated my views on the markets and outlook later”

“Stock prices and thereby indices are driven by random acts of buying and selling by investors /investment professionals driven by greed and fear and therefore it is difficult to make any significant sense out of near-term movements. However, one cannot miss the reality of profit growth and stocks do follow a broader trajectory of growth in profits over the long term. Thus, I would take the current global highs in markets with a pinch of salt. Benign interest rate environment and excess liquidity may have created some pockets of liquidity bubbles across global stocks/securities and one just needs to be cautious of this and not take such developments for granted. The enormity of paper trading at negative yields (last I read, it was 15 trillion$) cannot be ignored. January 2020 newsletter”.

And three stood out from Feb 2020 newsletter titled “Not a damp Squib”……

“Large-cap outperformance in 2019 was an emerging market (EM) phenomenon –

As per a broker report, 6 countries including South Korea, Taiwan, China, Philippines, Indonesia, and India, all have shown large cap outperformance v/s small caps in 2019. Flows have been driving Indian and other Asian EM markets. The quarterly performance of indices has coincided with ETF flows. In CY19, while Q1 FPI flows stood at USD 8.5bn with Nifty returns of 7.4%, Q3 FPI outflows were at USD 2.95 bn with Nifty returns of –5.7%. The same phenomenon was seen in MSCI EM returns versus ETF flows. The universe of EM ETFs shows an inflow of USD 17.5 bn in CY19. Of this, India cornered USD1.65bn. Quarterly performances have coincided with ETF flows.”

“US continues to entice its investors …. is there an asset bubble?”

“Covid-19: This is a developing story. Don’t know how it would pan out going forward but one needs to keep a watch. “

The last 15 days have done enough damage to markets as could have been done in 15 months of bear market. My fears of global excesses have come true but the crash hasn’t left anybody unscathed. Every market, index, commodity, and asset has been crushed. Unfortunately, there is no thrill in knowing that I was on the right path. I would rather have been wrong.

The only silver lining for me has been that both my strategies have beaten their benchmarks during 1 year by >10% and >23% respectively. Please visit our website where we upload the performance daily.

While markets get hammered, some positive news….

Oil falling to 30$ is a big plus for India.

The current Account Deficit narrowed to USD 1.3 billion, 0.2% of GDP lowest since June-16 owing to the narrowing trade deficit. A narrower CAD is positive as it translates to lower external financing requirements. BOP is expected to remain in surplus on account of muted demand conditions and oil-led disruptions.

January IIP grew 2% YoY (versus 1% expected), marking a rebound from 0.3% YoY contraction in December.

Headline CPI inflation in February moderated to 6.6% (as expected) versus 7.6% in January.

GSEC yields are down to 6.2%, reducing the cost of capital as long as spreads are also maintained.

Investors beeline into Yes Bank: Premier banks/FIs have lined up to invest in Yes Bank to pick up 80% shareholding for Rs100.0bn with SBI leading to keep a share of 48% and will keep at least 26% stake for the next three years. Other investors are HDFC/ICICIBC putting in Rs10bn each, Axis Rs6.0bn, KMB Rs5.0bn, FB & Bandhan Rs3.0bn, and IDFCFB Rs2.5bn with 75% being locked in for next three years. Bailout seems to have been started.

In the current fall, mid and small caps have not fallen as much as large caps indicating that the fall is more linked to ‘ Risk off ‘ selling by FPIs and the delivery-based investors in India seem less spooked.

What do we do now ??

Let me share what I put on my Linkedin page and Twitter page a couple of days back:-

“Returns made so meticulously over years wiped off in 2 weeks. Nothing works – #large cap, #mid cap, #quality, #growth, size of the company, #value, etc. all arguments are now out of the window. But ultimately panic is profitable and a V-shaped recovery will entail in the next few months. So don’t worry, it’s a passing phase. Wait and watch and buy once stability comes back”.

So keep a keen watch on the developments It may be a recession for the next 2-3 quarters and earnings across companies could get hammered but markets will bottom out before giving concrete signals. Stick to names that have earnings tailwinds such as domestic MNC pharma, contract manufacturing, specialty chemicals, and many others which could be less impacted by the current issues. At some point, many of the clobbered economy-linked names where valuations have become very enticing will also look good to buy. Even today these have come to the buy zone only if we understand this – Investing is a 5-10 years or even longer affair.

For investors with this time horizon, this market is a paradise.

I am waiting keenly for a V-shaped recovery which could entail in the future, the timing is unknown yet. Until next month.

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