2018: Year of volatility?

Year 2018.jpeg

Lot of investors joined stock market in the bull years of 2016-17. Most of them made good money only to loose it all in 2018. In our conversation, 8 out of 10 small cap investors are back to early 2017 levels as small caps is receiving consistent hammering since Feb’2018. Naturally, various questions are coming to investor’s mind, is 2018 a year of bears? Shall I exit stock market and come back when bulls are in operation? In this article, we present our view on it including the real drivers of poor performance and what possibly lies ahead.

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What has gone wrong with stock market?

Ongoing market correction started immediately after budget speech of our Finance Minister. Long term capital gains on equities did not go well with market participants. Result was panic selling. Ever since market has not fully recovered. It has remained volatile. This week Karnataka Election results caused another 400 point slide in Sensex despite BJP winning majority of seats. Investors did not like Congress coming to the power in the state.

Fast forward to rest of 2018, we have Rajasthan, Mizoram, M.P & Chattisgarh state elections coming up before the ultimate Lok Sabha Elections in April-May 2019. Many analysts believe that these events will keep market shaky and if BJP looses any of them, it will be crash the stock market.

“Is this what is going wrong with share market?”

No, these events are temporary in nature. They may influence market to react sharply for a few days but they do not define market course for long term. India as an economy is unstoppable and same share market has rallied a lot during Congress rule in 2001-05 and during recent BJP rule.

So if political reasons are not behind recent correction then what is the reason?

“Answer lies in macro economic landscape of India”

Flashback to 2014, when present government came to power. It was lucky to have macro economic factors in favor. Crude oil came down from $120 to $35 per barrel. India being net importer of crude oil benefited as current account deficit came down significantly. Rupee remained firm after significant volatility in 2012-13. Most importantly, quantitative easing was rampant in Europe, Japan & US. For beginners, Quantitative easing is essentially governments printing a lot of money and lending it at almost 0% to major financial corporations in the hope to revive the economy. No wonder Japan based Soft Bank gives annual investment targets to its management in a bid to exhaust cheap money. This was a powerful mix. Easy money went into startups like Flipkart, Uber, AirBnb, etc. Still a lot of money was available so that went into stock market. Result for India was a soaring bull market that lasted for two and half years.

What is happening now is exactly opposite. Oil price has jumped back to $78 per barrel. There is a pressure on Rupee as dollar is appreciating and recently it touched 68 rupees per dollar mark. America has decided to end quantitative easing and steadily increase borrowing rates for dollar. All this is resulting in cheap money disappearing from stock market and startups. Mr. Bansal quit Flipkart at very appropriate time. Corporate earnings have been languishing since last financial crisis. It has not surpassed previous levels even with cheap money. In India, demonetization and GST rollout further delayed corporate earnings revival.

In between all this, there is a first time investor who jumped into stock market when it was at peak and now trapped with his demat account in red. Worst, he still believes it is due to elections, capital gain tax on equity or bad management by current government.

What to do now?

These macro economic factors are beyond our control. Oil prices are driven by Gulf Countries. Cheap money (quantitative easing) is controlled by foreign countries. There is no point in thinking too much into them. We should focus on what we can control ourselves. Also, there is no point in exiting stock market due to these factors because this is the time when you get stocks available at cheap valuations. Situation seems very similar to 2012-13 when market kept on moving sideways with no definite direction. These phases keep on coming and this is when your mental or behavioral aspect of investment comes into play. Think about people who bought small cap stocks in 2013 when many of today’s multibaggers were available in single or double digits. They kept it for two or three long years without much return (think about it, 3 years!!) and then explosion happened. These are the things what you can control so that you are smiling all the way to the bank in 2022.

Coming back to this article’s heading, how 2018 is going to pan out? A Bear Year? Well, we humbly accept that we can’t predict future with 100% guarantee. However, macros take time to improve so most likely this year will have lots of ups and downs. There may be small bouts of bull runs but not prolonged. Though, there is silver lining in the form of improvement in corporate earnings which is evident from Q3 and Q4 results.

Gold may make a comeback since it is negatively co-related to stock market. We are not asking you to buy Gold for investment since Gold is for capital preservation & not for capital growth. If you are a millionaire and don’t want to loose from here, invest some portion in gold.

What you can also do it to use electric vehicles and buy Gold in electronic form. This will help in reducing India’s heavy dependence on oil and gold imports which collectively takes a toll on our macros.

As an investor, you should look to reduce your exposure to risky stocks which you bought under free advice. They are time-bombs and many would have exploded by now. But they may keep on exploding even further. It is advisable to focus on quality small caps as this is the time when you sow seeds for next set of multibaggers in 2022. You should consider learning and studying stock market to achieve consistent returns over long term. If you can’t do it because of your busy schedule and responsibilities, we are just a hyperlink away.