Some of us (investors) have lost our pants, and some of us have lost our socks, but all of us have lost something this week, betting on stocks. Some stocks have fallen by 50-60%, maybe more, but even the best of the best have fallen a fair bit from their 12-month highs. So, is it time to go shopping yet?
Everybody loves a discount sale...
A little under a fortnight ago, this felt like one of those annual online shopping sales. Stocks were available at a discount to their 52 week highs, and while benchmark indices, the NSE Nifty 50 (Nifty) and S&P BSE Sensex (Sensex), hadn't corrected by all that much, several individual names were looking fairly attractive. Even the likes of HDFC and HDFC Bank were available at ~10% lower than they were earlier in the year -- an offer I'd grab almost any time of the year.
Let's throw in some data here. Here's how things looked as on the 19th of September 2018.
The broader market was even more battered, with the NSE Midcap 100 and NSE Smallcap 100 having corrected ~14% and ~26%, respectively, from their 52 week highs. However, as it turns out, discounts were set to get deeper.
...but that's rarely as exciting as a flash sale
In the blink of an eye, the mood changed on Friday, the 21st of September 2018, with the Sensex and the Nifty losing ~4% each and the Midcap 100 and Smallcap 100 falling by over 8% to touch their intraday lows -- all within minutes. These are either mega-cap or broad-based indices, mind you, not individual stocks. Even high-quality stocks had fallen by double digit percentages. It was like a flash sale, and to my pleasant surprise, everybody was lined up to buy that big crack in benchmark indices.
Almost as quickly as it began, the correction had not only been arrested but almost entirely reversed, with eager buyers gobbling up stocks like hungry pirañas, showing no real signs of fear. While the small and midcap benchmark indices were still down a fair bit at the end of the trading day, the Sensex managed a strong fightback to end the day just 0.75% lower -- not an outlandish open-to-close movement these days for the Sensex.
A lot of us were probably at work, and by the time we could figure out what was happening, most stocks were back up a good deal from their day's lows. A lot of us had missed out. But there seemed to be a silver lining here -- it seemed as if the market had found a bottom. Having endured falling or flat prices for the better part of the year, this new found appetite was enthusing. The swiftness with which intraday losses were recovered led me to believe that investors were finally ready to come out collectively as buyers. But coming days would show that it wasn't so.
Over the weekend, investors (who didn't already know) learnt that a string of defaults on loans by IL&FS was responsible for Friday's (21 Sep) all-you-can-eat buffet in the market, and a looming liquidity squeeze was set to cast its shadow over an already fearful market.
Not good enough? The discounts are getting even deeper -- the garage sale is here
On Monday, the 24th of September, a large number of stocks were back down, some within hand-shaking distance of Friday's lows, and yet, there weren't as many takers. That has largely been the narrative throughout this week, with the bulls making wary appearances and the bears throwing some hefty punches. And from the looks of it, Thursday's (27 Sep) relapse, aggravated further by the rout on Friday (28 Sep), might just have punctured the little optimism that had begun to gather after a brief period of consolidation.
In the span of 1 week, stocks have gotten a lot cheaper. I won't go so far as to say whether they're cheap enough, based on conventional valuation metrics, but here's what transpired in the week gone by.
The IL&FS crisis has everybody worried, and understandably so. However, it's important to note that this turn of events wasn't a bolt from the blue. IL&FS first defaulted on a short-term loan from SIDBI on the 27th of August. The defaults that followed and the exits of Ramesh Bawa, MD and CEO of IL&FS Financial Services, and some board members on the 21st of September have only confirmed what we already knew. Meanwhile, DSP Mutual Fund reportedly sold INR 300 crores worth of Dewan Housing Finance Limited (DHFL) bonds at a steep 11% yield, implying a discount to the then prevailing market prices.
DSP MF was quick to clarify that it had "no concerns about DHFL", and that it merely wanted to reduce exposure to longer tenure bonds amid rising interest rates. However, the move raised eyebrows and triggered concerns over the exposure of NBFCs to IL&FS and their ability to survive the liquidity squeeze that would ensue, and panic gripped NBFC stocks. Separately, Yes Bank tanked after its MD and CEO, Rana Kapoor, was asked to step down by the RBI, and Infibeam, a former unicorn valued at over $1 billion, lost 70% of its value, reportedly due to WhatsApp rumours. The result was widespread panic that laid siege to the market.
Yet, investors didn't hesitate to go out and buy stocks during the flash sale on the 21st. Whether you should put that down to ignorance, instinct or vision is debatable, but the fact remains, and surprisingly so, that investors who spontaneously bought the dip on the 21st are evidently reluctant to buy at more attractive levels a week later.
And that's how this flash sale has turned into a garage sale -- a lot of folks would avoid buying anything at all here, but everything is way cheaper than it was, and if you know what you're buying and why, there's a chance you'll win big. If you aren't careful though, you might end up with somebody else's junk -- it's no secret, opportunities often come wrapped in risk and fear.
Time to beckon our inner Maximus?
Clearly, fear is gripping the market, and if the "gurus" are to be believed, this is the time to unleash our inner gladiators. But, inevitably for retail investors, fresh capital is limited, and we can't afford to be Maximus, not at the end of the month at least. So, should you risk your limited capital by going on a shopping spree right now?
Your decision at this point will depend almost entirely on a handful of factors. For starters, your investment objectives, style and, most importantly, your risk appetite should define your approach. However, your assessment of the situation and the risk involved is probably even more important. You could be way off the mark, but putting things in context and building a rough "guesstimate" is often the best way to gain some clarity about what to do next.
How big is this IL&FS crisis?
IL&FS' debt is worth INR 90,000 crores, and in the unlikely worst-case scenario that all of it goes bad, that's how much it'll cost the economy. Without a doubt, INR 90,000 crores is a lot of money. But viewed in the backdrop of India's pile of gross NPAs, worth INR 10.25 lac crores, the IL&FS crisis, potentially costing us under 9% of India's gross NPAs, is less daunting.
Make no mistake, I'm not underestimating the situation. I know the issue could take several months to fix. I know that markets will be volatile till the general elections next year. And I'm cognizant of the possibility that markets could correct further from here. All I'm saying is that the market seems to have overreacted -- as it often does, both on the way up and on the way down -- at least in the context of some stocks, if not all.
Perhaps, the fear has less to do with IL&FS itself and more to do with "who will fall next"? Or perhaps it stems from the revelation that even HDFC (holds a 9% stake in IL&FS), which runs possibly the best group of lending institutions in the country, has its set of bad eggs. Or maybe there's something we don't know -- retail investors are often the last to find out what hit them.
Either way, I personally think we must do our best to learn what we can and act on what we know, rather than dwelling on what we might not know and everything that could possibly go wrong. And as far as HDFC goes, the fact that it has refused to lend more money to IL&FS tells me that it knows better than to throw good money after bad. Besides, if you can't trust HDFC with your money, where exactly do you go?
Time to start nibbling at the market? Will it fall further?
The situation could get worse before it gets better. For a while, it's very likely that scared investors will use every rally to exit, and sitting tight through these phases takes some clarity of thought and patience. If you can't stomach the possibility of a 20% hit in the matter of a few days, investing at this point is probably a bad idea.
But if you're a long-term investor, have the risk appetite and are clear about that, I believe this could be a good time to start accumulating shares, slowly and steadily, be it on the way up or down (yes, on the way down as well). It's imperative that while you buy, you leave enough cash in the bank to accommodate further corrections.
First things first, I personally don't think it's possible to time the market to perfection, unless you're terribly lucky. The best prices are often found at the peak of the crisis, but as much as we would like to be able to identify that inflexion point, I for one lack that ability. I prefer to focus on assessing whether the prevailing prices are attractive or not, and I think they are at this point. And by extension, I think they'll be even more attractive if they fall further, implying that I should be willing to buy as prices fall, if they do.
These are prices that would make you salivate any day of the year -- prices you couldn't lay your hands on earlier in the year (or even last year, in some cases) -- and if you're going to hold on for the next 5-10 years, these prices start to look very attractive. True long-term investors see opportunity where broader markets see fear, and if you approach the opportunity without being overambitious, you should be okay.
Some may argue that such an approach puts capital at risk and that it's better to wait till the market settles down before risking an entry, lest you catch a falling knife. However, to incorporate any kind of discipline in investing, I find that one has to take emotions out of the equation to the extent possible (think SIP). It may not necessarily be the best approach, but more often than not, it helps me do what I should.
Focus on quality and pockets of value
Corrections like this often separate the wheat from the chaff, but only on the way up -- and some stocks never make it out of the rut. So, be sure about what you're buying at the bottom and why. At times like this, when everything is available at a discount, I prefer to back and exhaust my common sense options before venturing out further. If you don't have adequate exposure to high-quality stocks, this is a great opportunity to build that exposure.
Someone I know didn't want to add to his thin position in HDFC Bank because his average buying price was way lower. It's handy to keep in mind that the objective is not merely to average your buying prices, but to generate returns.
Second, there is great value in pockets. Take Maruti Suzuki, for instance, which generates solid free cash flows and very little or nothing to do with IL&FS or the expected liquidity squeeze. Yet, it's down by over 26% from its peak earlier this year. In my humble opinion, this a gaping hole that will get filled up pretty quickly. When optimism returns, and it will, markets often overreact on the way up, just as they did on the way down.
Purely for your reference, and since I already have gathered price movement data for Sensex component stocks, here it is below.
Disclosure -- what I'm buying
Over the course of the last few months, I realised that my positions in HDFC, HDFC Bank and L&T weren't as big as I'd have liked them to be. So, I've used the last couple of weeks to add to those positions. In the normal course, I wouldn't increase my already substantial exposure to Maruti Suzuki, but given the significant correction, I decided to do so with a short- to medium-term horizon.
Exiting TCS in the midst of Trump's war on outsourcing and work visas has turned out to be a huge mistake, which I am regretting more each day. I don't have any positions in M&M, Indusind Bank and Kotak Mahindra Bank, but I'm weighing those options at the moment.
I have been adding to my positions in Bajaj Finance (down 28% from its 52 week high), Gruh Finance (down 21%), Sterlite Technologies (down 29%), Motilal Oswal Financial Services (down 58%) and HDFC AMC (down 32%), and might add to some other positions as well in the coming weeks. A couple of these are risky bets at this point because they have other underlying problems, which I plan to write about in subsequent posts covering these individual stocks in detail, but I'm backing my conviction and hope to get through unscathed.
Disclaimer: I am a newbie in the stock market, but then markets are such that everybody always is -- predictions do go horribly wrong. Investments in the stock market do not come with any guaranteed returns. I may or may not hold positions in any of the stocks mentioned in this post, and my opinions could be biased. I am not a qualified investment advisor. The content in this post only reflects my personal opinion and should not be treated as investment advice. Readers are advised to carry out their own due diligence and consult their investment advisors to understand the risks involved in any investment. Trading in stocks and shares carries the risk of monetary loss.
Everybody loves a discount sale...
A little under a fortnight ago, this felt like one of those annual online shopping sales. Stocks were available at a discount to their 52 week highs, and while benchmark indices, the NSE Nifty 50 (Nifty) and S&P BSE Sensex (Sensex), hadn't corrected by all that much, several individual names were looking fairly attractive. Even the likes of HDFC and HDFC Bank were available at ~10% lower than they were earlier in the year -- an offer I'd grab almost any time of the year.
Let's throw in some data here. Here's how things looked as on the 19th of September 2018.
...but that's rarely as exciting as a flash sale
In the blink of an eye, the mood changed on Friday, the 21st of September 2018, with the Sensex and the Nifty losing ~4% each and the Midcap 100 and Smallcap 100 falling by over 8% to touch their intraday lows -- all within minutes. These are either mega-cap or broad-based indices, mind you, not individual stocks. Even high-quality stocks had fallen by double digit percentages. It was like a flash sale, and to my pleasant surprise, everybody was lined up to buy that big crack in benchmark indices.
Almost as quickly as it began, the correction had not only been arrested but almost entirely reversed, with eager buyers gobbling up stocks like hungry pirañas, showing no real signs of fear. While the small and midcap benchmark indices were still down a fair bit at the end of the trading day, the Sensex managed a strong fightback to end the day just 0.75% lower -- not an outlandish open-to-close movement these days for the Sensex.
Over the weekend, investors (who didn't already know) learnt that a string of defaults on loans by IL&FS was responsible for Friday's (21 Sep) all-you-can-eat buffet in the market, and a looming liquidity squeeze was set to cast its shadow over an already fearful market.
Not good enough? The discounts are getting even deeper -- the garage sale is here
On Monday, the 24th of September, a large number of stocks were back down, some within hand-shaking distance of Friday's lows, and yet, there weren't as many takers. That has largely been the narrative throughout this week, with the bulls making wary appearances and the bears throwing some hefty punches. And from the looks of it, Thursday's (27 Sep) relapse, aggravated further by the rout on Friday (28 Sep), might just have punctured the little optimism that had begun to gather after a brief period of consolidation.
In the span of 1 week, stocks have gotten a lot cheaper. I won't go so far as to say whether they're cheap enough, based on conventional valuation metrics, but here's what transpired in the week gone by.
The IL&FS crisis has everybody worried, and understandably so. However, it's important to note that this turn of events wasn't a bolt from the blue. IL&FS first defaulted on a short-term loan from SIDBI on the 27th of August. The defaults that followed and the exits of Ramesh Bawa, MD and CEO of IL&FS Financial Services, and some board members on the 21st of September have only confirmed what we already knew. Meanwhile, DSP Mutual Fund reportedly sold INR 300 crores worth of Dewan Housing Finance Limited (DHFL) bonds at a steep 11% yield, implying a discount to the then prevailing market prices.
DSP MF was quick to clarify that it had "no concerns about DHFL", and that it merely wanted to reduce exposure to longer tenure bonds amid rising interest rates. However, the move raised eyebrows and triggered concerns over the exposure of NBFCs to IL&FS and their ability to survive the liquidity squeeze that would ensue, and panic gripped NBFC stocks. Separately, Yes Bank tanked after its MD and CEO, Rana Kapoor, was asked to step down by the RBI, and Infibeam, a former unicorn valued at over $1 billion, lost 70% of its value, reportedly due to WhatsApp rumours. The result was widespread panic that laid siege to the market.
Yet, investors didn't hesitate to go out and buy stocks during the flash sale on the 21st. Whether you should put that down to ignorance, instinct or vision is debatable, but the fact remains, and surprisingly so, that investors who spontaneously bought the dip on the 21st are evidently reluctant to buy at more attractive levels a week later.
And that's how this flash sale has turned into a garage sale -- a lot of folks would avoid buying anything at all here, but everything is way cheaper than it was, and if you know what you're buying and why, there's a chance you'll win big. If you aren't careful though, you might end up with somebody else's junk -- it's no secret, opportunities often come wrapped in risk and fear.
Time to beckon our inner Maximus?
Clearly, fear is gripping the market, and if the "gurus" are to be believed, this is the time to unleash our inner gladiators. But, inevitably for retail investors, fresh capital is limited, and we can't afford to be Maximus, not at the end of the month at least. So, should you risk your limited capital by going on a shopping spree right now?
Your decision at this point will depend almost entirely on a handful of factors. For starters, your investment objectives, style and, most importantly, your risk appetite should define your approach. However, your assessment of the situation and the risk involved is probably even more important. You could be way off the mark, but putting things in context and building a rough "guesstimate" is often the best way to gain some clarity about what to do next.
How big is this IL&FS crisis?
IL&FS' debt is worth INR 90,000 crores, and in the unlikely worst-case scenario that all of it goes bad, that's how much it'll cost the economy. Without a doubt, INR 90,000 crores is a lot of money. But viewed in the backdrop of India's pile of gross NPAs, worth INR 10.25 lac crores, the IL&FS crisis, potentially costing us under 9% of India's gross NPAs, is less daunting.
Make no mistake, I'm not underestimating the situation. I know the issue could take several months to fix. I know that markets will be volatile till the general elections next year. And I'm cognizant of the possibility that markets could correct further from here. All I'm saying is that the market seems to have overreacted -- as it often does, both on the way up and on the way down -- at least in the context of some stocks, if not all.
Perhaps, the fear has less to do with IL&FS itself and more to do with "who will fall next"? Or perhaps it stems from the revelation that even HDFC (holds a 9% stake in IL&FS), which runs possibly the best group of lending institutions in the country, has its set of bad eggs. Or maybe there's something we don't know -- retail investors are often the last to find out what hit them.
Either way, I personally think we must do our best to learn what we can and act on what we know, rather than dwelling on what we might not know and everything that could possibly go wrong. And as far as HDFC goes, the fact that it has refused to lend more money to IL&FS tells me that it knows better than to throw good money after bad. Besides, if you can't trust HDFC with your money, where exactly do you go?
Time to start nibbling at the market? Will it fall further?
The situation could get worse before it gets better. For a while, it's very likely that scared investors will use every rally to exit, and sitting tight through these phases takes some clarity of thought and patience. If you can't stomach the possibility of a 20% hit in the matter of a few days, investing at this point is probably a bad idea.
But if you're a long-term investor, have the risk appetite and are clear about that, I believe this could be a good time to start accumulating shares, slowly and steadily, be it on the way up or down (yes, on the way down as well). It's imperative that while you buy, you leave enough cash in the bank to accommodate further corrections.
First things first, I personally don't think it's possible to time the market to perfection, unless you're terribly lucky. The best prices are often found at the peak of the crisis, but as much as we would like to be able to identify that inflexion point, I for one lack that ability. I prefer to focus on assessing whether the prevailing prices are attractive or not, and I think they are at this point. And by extension, I think they'll be even more attractive if they fall further, implying that I should be willing to buy as prices fall, if they do.
These are prices that would make you salivate any day of the year -- prices you couldn't lay your hands on earlier in the year (or even last year, in some cases) -- and if you're going to hold on for the next 5-10 years, these prices start to look very attractive. True long-term investors see opportunity where broader markets see fear, and if you approach the opportunity without being overambitious, you should be okay.
Some may argue that such an approach puts capital at risk and that it's better to wait till the market settles down before risking an entry, lest you catch a falling knife. However, to incorporate any kind of discipline in investing, I find that one has to take emotions out of the equation to the extent possible (think SIP). It may not necessarily be the best approach, but more often than not, it helps me do what I should.
Focus on quality and pockets of value
Corrections like this often separate the wheat from the chaff, but only on the way up -- and some stocks never make it out of the rut. So, be sure about what you're buying at the bottom and why. At times like this, when everything is available at a discount, I prefer to back and exhaust my common sense options before venturing out further. If you don't have adequate exposure to high-quality stocks, this is a great opportunity to build that exposure.
Someone I know didn't want to add to his thin position in HDFC Bank because his average buying price was way lower. It's handy to keep in mind that the objective is not merely to average your buying prices, but to generate returns.
Second, there is great value in pockets. Take Maruti Suzuki, for instance, which generates solid free cash flows and very little or nothing to do with IL&FS or the expected liquidity squeeze. Yet, it's down by over 26% from its peak earlier this year. In my humble opinion, this a gaping hole that will get filled up pretty quickly. When optimism returns, and it will, markets often overreact on the way up, just as they did on the way down.
Purely for your reference, and since I already have gathered price movement data for Sensex component stocks, here it is below.
Disclosure -- what I'm buying
Over the course of the last few months, I realised that my positions in HDFC, HDFC Bank and L&T weren't as big as I'd have liked them to be. So, I've used the last couple of weeks to add to those positions. In the normal course, I wouldn't increase my already substantial exposure to Maruti Suzuki, but given the significant correction, I decided to do so with a short- to medium-term horizon.
Exiting TCS in the midst of Trump's war on outsourcing and work visas has turned out to be a huge mistake, which I am regretting more each day. I don't have any positions in M&M, Indusind Bank and Kotak Mahindra Bank, but I'm weighing those options at the moment.
I have been adding to my positions in Bajaj Finance (down 28% from its 52 week high), Gruh Finance (down 21%), Sterlite Technologies (down 29%), Motilal Oswal Financial Services (down 58%) and HDFC AMC (down 32%), and might add to some other positions as well in the coming weeks. A couple of these are risky bets at this point because they have other underlying problems, which I plan to write about in subsequent posts covering these individual stocks in detail, but I'm backing my conviction and hope to get through unscathed.
Disclaimer: I am a newbie in the stock market, but then markets are such that everybody always is -- predictions do go horribly wrong. Investments in the stock market do not come with any guaranteed returns. I may or may not hold positions in any of the stocks mentioned in this post, and my opinions could be biased. I am not a qualified investment advisor. The content in this post only reflects my personal opinion and should not be treated as investment advice. Readers are advised to carry out their own due diligence and consult their investment advisors to understand the risks involved in any investment. Trading in stocks and shares carries the risk of monetary loss.
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