Is this the beginning of bear market?

The way market behaved today scared investors. Many investors are asking—Is this the beginning of bear market? How does one explain so much volatility in the Nifty and Sensex? On Friday, at one point of time, Sensex lost more than 1100 points, but later recovered with a loss of 280 points over the previous day’s close. This market poses real danger to the NBFCs, who were the darling of the investors till the previous trading day. In last few years, these NBFCs created huge wealth for the investors, but today found no buyers even at lower levels. Dewan Housing Finance (DHFL) stock was down by as much as 55 per cent intra-day (as its in F&O, hence no upper or lower circuit) and recovered some ground after the management clarified that there is nothing wrong with the company and also, they have no exposure to IL&FS. But the stock still closed at 42 per cent down from the previous day’s close, suggesting that the market is no mood to buy the story. India Bulls Finance also came under pressure and closed the day with 8 per cent loss. Almost all NBFCs came under pressure on Friday, including names like Bajaj Finance and M&M Finance. The market could not figure out why there has been sudden pressure on NBFC stocks. It would take some time before one can come out with credible explanation for this fall. Yes Bank, which is part of the Nifty and Sensex, lost 29 per cent on Friday, but it was expected that it will fall as RBI did not extend the tenure of Rana Kapoor as CMD of Yes Bank for three years, but the quantum of fall surprised the market participants. Rana would step down by January 2019 and the management will have to find a new CMD by then. It is not very clear at this point of time whether Rana would continue as a director on the bank. The carnage was equally severe on mid-caps and small-caps as Nifty Smallcap 100 was down by 3.53 per cent and Nifty Midcap 100 was down by 2.43 per cent.

Volatility has gone up

When the markets closed last week, there was some kind of optimism, as during the weekend, the government was expected to announce some measures that could help lift market sentiments. The government did announce some measures to stem the fall in the value of the rupee, but that did not help lift the Sensex. On Monday, Sensex lost more than 500 points, and then on every trading day this week, the market ended in the red. We lost 1250 points on the Sensex this week. In fact, the September month is turning out to be the worst month for the investors, as on two occasions out of 13 trading days, Sensex lost more than 500 points and on one occasion it lost 468 points. In the month of September, Sensex lost 1800 points and we are still nine days away from the end of this month. One thing is certain that the volatility in the stock market has increased. When volatility increases, the market moves sharply on either side. This time around, it is on the downside. The general sentiments have taken a huge beating and this is not something good for the market. The situation is more worrisome for the mid-caps and small-caps as these have seen some major falls.

The advance-decline ratio is worsening. There are more declines than advances. In the month of September, for Nifty 100 (consisting of large-caps), for every one advance, there were four declines. The situation is worse for the mid-caps and small-caps where for every one advance, there are eight declines.

So, is this the beginning of 2008?

Now that brings in the question: Are we in the bear market? The answer is NO. While we may see some more corrections in the weeks and months to come, I don’t expect situation like 2008. There are a couple of factors that make me believe this. First, India Inc earnings cycle is on the revival path (unlike in 2008, when it had peaked). It means that the earnings growth will keep the investors interested in the market. Second, we have a strong government at the Centre which is assuring that the fiscal discipline would be maintained. With the fear of the united opposition taking on the Modi regime fading (as Mayavati tied up with Jogi in Chhatisgarh and fighting on her own in MP), it increases the probability of Modi government retaining power in the next general elections. While I do expect domestic inflows to reduce, I don’t expect outflows. While there was froth in the NBFCs and private sector banks, many of the sectors and companies are not in the expensive territory. That means there could be sector rotation in the market, but money may not go out of the market. But do expect more pains before we can have a smile back on the investor’s face.

So how should one play this market?

This kind of fall clearly suggests that the sentiments are not in favour of the bulls. There are headwinds for the market, which are becoming stronger and that makes the bull case scenario rather difficult to justify. In my September 11 column written for MarketsMojo, I had warned investors not to chase stocks whose valuations are stretched (read here). I had then advised to adopt a stock-specific approach.

There is normally a tendency to chase stocks that have fallen significantly. I would rather suggest otherwise. Such stocks are not value buys. If one can recollect, in the past companies like Financial Technologies, Manpasand Beverages and Vakrangee did clarify when their scrips came under pressure that there was nothing wrong with the company, but these companies continued to fall post the clarifications too. DHFL did not bounce back significantly too post clarification. There is no point catching a falling knife. The need of the hour is to take shelter in the quality stocks that are available at reasonable valuations. Also, don’t buy at one go but stagger your investments, as these companies would be available at good valuation for quite some time as I don’t expect the market to run up in hurry. As mentioned in the September 11 article, Indian stock market valuation has become expensive (19 times one year forward and one of the costliest in the world) and with the rate of interest going up, PE should come down.

No momentum play

Time is to avoid momentum play. Also, instead of taking 3-6 months view on the market, take at least one year view. But don’t panic when the market behaves like it did on Friday. Stay calm and take rational decisions. In situations like these, one should have control over fear. Time will come when your patience in the market will pay, provided you are invested in the right kind of companies. Right now, keep your expectations low from the market.

Overall, we feel, markets is cautious and good quality at reasonable valuation will be rewarded. Expectation needs to be reasonable and so long as you have greed & fear control, you will be just OK!