Over last two years, we have seen many moods of Mr. Market. From gloom to doom to boom and back again. Overall, bears commanded tremendous control over bulls. It is only natural that investors are loosing hope and starting to move money elsewhere. Especially those investors who started during last bull run in 2016-18 time-frame. Seasoned investors however are doing the opposite, they keep on adding more money to make bumper profit when market rebounds. But the question is when will market rebound. The easy answer is soon but investors want to know how soon 🙂
To find a realistic & probably much accurate answer, we can analyse past patterns (historical data) followed by analysis of present situation. Combining these two we can try to estimate a probable future direction. Let’s look at historical data first.
Historical Data Analysis
BSE Small Cap Performance (2003-2019)
|Year||Index @ 1st Jan||Index @ 31 Dec||Returns (%)|
Based on above data, we can deduce following patterns:
- Small caps have never given negative returns for two successive years. 2019 seems to be adding a new chapter of two successive negative returns. If this happens, changes will only get brighter for 2020 by the law of average.
- Current crash is nothing when compared to 2008. Whopping -72% vs -23% in 2018.
- First half of the decade (2000-2005) was the golden era for small caps. Investors from that time period must be sitting at multiX gains.
- The cycle of over & under performance is getting elongated with time. The slope of new cycle is beginning much sharper followed by much more flatter trajectory. For example in 2014, a massive jump of 69% followed by two years of flat returns. Similarly, after 2018, we are about to witness flatter returns in 2019 (though -11% so far).
- Since cycle is getting longer towards the tail-end, to make money, investor must enter well before the next cycle start to capture sharp bursts during early phase of the cycle. 2020 can be that year followed by slow moving 2021, 2022.
Current Market Factor Analysis
1 Initially, PSU banks started to fall into NPAs and now NBFCs are biting the dust. As a resultant, there is not much lender appetite left in the market. People who are looking for a fresh loan at this juncture will already know about it. Banks & financial institutions are particularly wary of lending to corporates. The biggest capex creator, Government of India, has its hands tied due to rising fiscal deficit, thanks to macros like Oil, Gold, etc. The PSU maharajas like Air India, BSNL are added sunk cost. This is seen as cement consumption which was expected to rise has started to fall in many regions of the country. Cement & steel are proxy of capex cycle, both are trending downwards.
2 India is not a major manufacturing destination barring Automobile, Steel & Textile. Steel & textile are already witnessing softness since past few years due to China surplus & heightened competition in developing economies (Vietnam, Indonesia & Bangladesh). With slump in automobile, it’s not just autos which is down but a whole set of auto ancillaries & people dependent directly or indirectly on auto are feeling the heat. Try to recollect what you see in a B-town or C-town in India. Most shops in the prime location are either selling cars, loans or clothes. Rest shops are from unorganized sectors like hotels, restaurants & sweets. These growth engines have slowed down due to different reasons. Cars due to traffic on Indian roads + Uber & Ola entering more & more towns. Home loans are down due to builders going bankrupt resulting in loss of trust from buyers. Textile & clothing is the only segment which can see some rebound as this is mostly linked to discretionary expenditure which usually revives in festive season.
3 Internationally, FIIs have been reducing their investment in India due to ongoing slowdown. Looking from their perspective, among emerging markets, India is still one of the most expensive stock markets. You have Brazil, Russia, South Africa, even China trading at much cheaper valuations. With hot & cold policy on FII taxation, Government actions have been a further dampener .
4 Low Base of 2019: Indian economy went in to a tailspin starting Oct-Dec 2018 timeframe hence Q3 onwards results started to show the impacts. With lower base of 2018-19, the next set of quarterly results in 2019-20 will not look so bad or may be flat initially, only to jump up at later point in time. If economy is able to grow once again, animal spirits will be back.
5 US Elections & Trade War on China: This is a big factor underplaying global markets. The US-China trade war has created so much confusion that investors are not sure where to go resulting in risk averse approach and limited investments. Since China has much to lose in this trade war, they are going slow in case they can push it until next US Presidential elections which are due in later part of 2020. Till this event is out of the sight, volatility in international market can be expected. Sadly, volatility in international market often results in emerging markets being their first victim. So over next one year, US politics will keep volatility sufficiently high for FII investment in India.
6 Oil & Saudi Aramco IPO: This is very specific to oil guzzling countries like India. Since India imports much of its oil in USD and same amount of USD is not exported back, this results in fiscal deficit. The US sanctions on cheaper Iranian oil also increases our dependence on Saudi oil. OPEC, the cartel for oil production in middle-east has been persistent in their efforts to keep oil prices up. The Kingdom of Saudi Arabia plans to go for an IPO for Saudi Aramco, the largest producer of oil in the world. It will be a mega IPO and oil prices at that point in time will hold the key to its valuations. Hence, we do not think oil prices will come down any time soon. The impact of oil is not limited to only Government’s finances. Costly crude oil also pushes cost up for oil derivatives like paraffin, anilines, etc. This puts stress on many other sectors of the economy in India. Chemical, Mining, Transport being one the them.
- Market may possibly rebound in 2020.
- Investors are fortunate to be getting such a big investment window as they can add up more investments over many months. Very good for salaried investors.
- Rebound is going to be sharp in 2020 or early 2021. You need to be well invested by then.
- Needless to say, choosing right stock to ride this rebound is very important. Choose your bets carefully.
- The historical data can give you insights as-in how small cap investment journey feels like. You can estimate the ups & downs that investors had faced over last two decades. Using this you can try to hone your own mental muscle. History is great teacher and provides tuition free of cost. If this seems too much, it is perfectly fine to skip small cap investment and switch to other asset classes. Whatever you choose, stay in there to enjoy full benefits. Remember running behind a tide will ensure staying behind the tide all the time.
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