Markets Update

Hello friends,

I last wrote to you on 30th Jan on the most important question of the season; When to sell stocks. Those were my thoughts on the subject of selling. Q4 2021-22 has been quite happening with the third Covid wave and the Ukraine war. And naturally, the markets have responded with tremendous volatility. At the start of Q3, the most important questions doing the rounds were; if the markets are approaching a “bubble” state and if and when one should start selling or at least part offloading. I, myself, was in two minds initially. One option was to wait for Q3 and Q4 results, which were expected to be good in view of the anticipated 9% economic growth and then make a decision. The second option was to start offloading a little by little right after Q3 results as the anticipated good Q4 results seem to have already been factored in the valuations.

After much thought and consultation with friends, I decided upon the second choice and started selling from the first week of February 2022 after most of the Q3 results were out. I had a strategy to exit completely the laggards (fundamentally not so good stocks) in the portfolio, sell off the cyclicals and trim down positions in fundamentally good stocks that have run up too much. Accordingly, I made three lists of my portfolio stocks and started implementing the strategy. However, things were not destined to go as I planned.

Many are the plans in the mind of a man, but it is the purpose of the LORD that will stand.

Bible

And the purpose of the Lord turned out to be a destructive one this time and the destruction is rather manmade. The Omicron led third wave peaked in January itself and quickly dissipated but the Russia Ukraine war clouds started hovering on the horizon from the second week of February. The war actually started on the 24th. The markets responded with a brutal correction robbing the investors of about half the gains made in the last two years. As usual, the drop was more severe for the broader markets (Read small caps). Recovery is currently underway but it is likely to be much delayed.

The war has disrupted the supply chains, heated up the energy market and has divided the world in two clear groups. Crude oil briefly touched $128/bbl and so far has remained near the $ 115 range. Inflation and a good dent in economic growth are the two sure outcomes. India, with her long and historical ties with Russia and the recent grouping up with the Quad, finds herself in an unenviable position politically. It is like getting caught between the Scylla and the Charybdis.

Where do we go from here? The Q4 results will start pouring in from the second week of April and these are likely to be somewhat affected by the recent happenings. More importantly, the sentiments will not be up till the war goes on and there are no signs of an early end to the conflict. In any case, the upcoming Feds interest raise at regular intervals will suck out the extra liquidity in the world markets and with added inflation, the capital may flow towards bonds.

There is however a very interesting data point. FPIs have sold worth Rs. 233,880 crores net from Indian markets since April 2021. They were net buyers worth Rs. 201,373 crores from April 2020 to March 2021. (Source: Moneycontrol) Now here comes the twist. Please have a look at the BSE indices monthly closing charts below for the period April 2020 to March (23rd) 2022.

It can be seen that the indices zoomed from April 20 to March 21 with FPI inflow of Rs. 201,373 crores but despite the withdrawal of more than that value from April 21 till date, the indices continued their upward journey. The Sensex has actually gone up 18% despite flight of this much capital in 2021-22. How this has become possible? The answer lies with the domestic investors. They have come in a big way to join the party. This, one can say, is a tectonic shift in the way Indian stock markets behaved hitherto. Gone are the days when the Indian stock market danced to the tune of FPIs. Now it seems to have found solid ground. As per sources, the number of Demat accounts have more than doubled to 7.7 crore as of November 2021 from 3.6 crore in March 2019.

The Ukraine war is not likely to go on indefinitely and there will be an end sooner than later. That will surely lift the market sentiments and also ease inflationary pressures. The upcoming Q4 results may not be spectacular but likely to be good overall. And in case even some of the FPIs return, there is no telling where that will take the market. On the downside, prolonging of war or China invading Taiwan or the inflation spiraling out of control can’t be ruled out and if they actually happen, will surely play a spoilsport.

In my opinion, the forward-looking market will see the factors favoring a market comeback more likely to actually emerge rather than those disfavoring it. And there are signs to point in that direction. If that happens, then there is wisdom in getting invested more in some good stocks still available at reasonable valuations. Else just wait it out for an opportune time to effect the selling strategy.

Overall market valuations are high and ultimately these will revert to mean, guided by the earnings. How good these earnings are going to be is to be seen.

In the short run, the market is a voting machine, but in the long run, it is a weighing machine.

Benjamin Graham

Happy Investing.

Do revert with your comments and suggestions.

Often the journey is more interesting than the destination

bhushan

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