The crash in the markets since the end of December caught most, including me by surprise. Although I was perturbed by the continuous and unbridled rise of small and mid cap stocks the divergence where large caps were not doing well and small caps kept on rising was an enigma for sure. Whatsapp groups were full of recommendations on small caps and how each person was smarter than the other because he bought XYZ which went up 100% in six months was a warning sign for sure. The correction in this segment of the market could not have happened without an overall market meltdown and that is what we have seen over the last 15 days. However the outlook looks bright now.
As on yesterday the markets were down 6.5% and there was pessimism all around and doomsday forecasters were prominent all across. Last year in January the markets rose by 6.5% and it was supposed to be the start of a huge bull phase where year end index targets were 10000-11000 for the Nifty. Last year the assumption was backed by poor fundamentals and today the pessimism is on weak footing as fundamentals and recovery prospects are strong.
Remember, the fall in global markets has been due to fears of an imminent crisis. These are ONLY FEARS and not backed by reality. China has not collapsed. It is a slowing economy and will remain a slowing economy for years. US is a recovering economy and will keep on growing at 2-2.5% for years now. Eurozone is recovering from almost zero growth and will grow at 1-2% for years to come. This is the reality which is known and as such is factored in. I have written about China in detail in my piece last week so will not repeat it.
When so many people can forecast a disaster, the disaster will not come. Those who are comparing the markets today to 2008 are on very very thin ice. Valuations at that time were 30-32X earnings. There was euphoria all around. Equity funds globally had got record flows in 2007. Inflation was high and bubbles abounded all over. There is nothing like this today. Valuations are 30-50% of 2008 levels across markets. Last year was one of record outflows from Emerging Market and US Equity funds. Equity markets, commodities, Real Estate all have collapsed. The only bubble can be in the bond markets. Now the low yields on Sovereign bonds are both due to central bank buying i.e. QE’s as well as expectations that inflation and growth will remain low in these economies for years. Junk bond is a different space where bubbles might abound, however the pricking of the same started nearly a year back. Most of these forecasters of doom are just playing on two factors, the first 8 year cycle of market busts which is on thin ice as it happened in 2000 and 2008 only. The second, one of the longest expansions in the US which is again on thin ice as the expansion has been moderate and not aggressive with a pickup in growth and inflation.
People are anticipating a disaster just looking at commodity prices without analyzing the fact that most of the incremental demand for commodities came from China for years. China consumes 50% of the worlds Coal, Steel, iron ore etc and 30-40% of many metals. At this economy transforms the commodity cycle will remain low for years. This is unequivocally positive for India without any qualifications. A huge transfer of wealth happened from consumers to producers for years starting the early 2000’s, this is now payback time. Capital flows from these countries will reduce for sure; however remember these flows were our obligations to pay them back even if the flows were in the form of equity or debt. When we save money it is a clean shift of wealth and savings to us.
Markets have now corrected 50% of the entire move from the day the Raghuram Rajan took over as RBI Governor and the entire MODI premium is gone now. The question is, has the country not moved forward over the last two years? Is the outlook not better than what it was 2 years back? Are we not away from double digit inflation of the past to sustainable low inflation despite two poor monsoons in succession? Answer these questions and you will get your answer. The entire story of an apocalypse in banking stocks is nothing but fear mongering more near the end of the down cycle.
Markets are looking extremely attractive taking into account any parameter. The world is not an abyss but much more stable than what it was a year or two back. Euro zone has not collapsed, End of QE of the US FED did not end the world, and China is on the way towards a soft landing not hard landing. Do not bother about flows. Flow analysis to predict markets is the worst thing to do. When there is value money will come. If you go out and buy junk stocks which crash without any reason as they rose the same way do not blame the markets. Traders who want daily market predictions best of luck to you as you will be more wrong than right. Invest wisely; markets will do well very well. Things will be much better going forward as there is more value in Indian Stocks today than there was any time in the last 5 years.