The stock market tends to periodically enter phases of greed and fear. And during phases led by fear, the market provides the best opportunities to long-term investors, only if they are able to control their emotions and stay on course. Even though the Sensex has moved up from 3,500 points in 2002 to 35,000 in 2018, which is a 10 times increase in a span of 16 years, this journey upwards has never been in one direction. And over the last 10 years, the benchmark index has moved up four times, but the rise in the benchmark has never come without its bumps and shocks. I still remember the shock of May 17, 2004, when the Sensex fell by over 800 points in a single day and trading was halted twice.
This fall was unprecedented because it was not rational at all. The only person who spoke to me was Motilal Oswal, chairman and managing director of Motilal Oswal Financial Services. He said that it was the best time for investors and that he was not frazzled at all. My first lesson on 'fear management' came from him on that fateful day. So, it was not surprising at all when the fall of May 17th was followed by an equally dramatic recovery, all in a span of 48 hours. Historical data shows that the market tends to recover within one, three or six months after this steep correction. But we will come to that later. On that fateful day of May 17, 2004, the benchmark Sensex recovered 250 points on the same day after clocking an intraday fall of over 800 points. As the market froze, smart sellers too turned buyers because they saw value in such a massive single-day correction. Market participants who had pressed the panic button or had leveraged positions and had to sell after the Left parties made their views on the economy public would have definitely suffered. But real investors started buying again within hours of the fall. Net foreign institutional selling was a mere `63 crore on May 17, 2004. Interestingly, the retail investors hardly had time to react as the movement was too swift.
Sometimes it is important to recall these situations as they help investors remain focused. Since September, the markets have been correction mode yet again as oil prices have been on the boil, rupee on a downward trajectory and foreign institutional investors turned sellers as a weaker rupee would have ended up eroding the value of their investments even further. The events of May 17, 2004, show that seasoned investors tend to use corrections as windows of opportunity to add more muscle to their portfolios. For those who are tempted to sell and run at the first sign of a correction should delve deeper into past corrections and pace of recovery. According to research done by Elara Capital, since 2006 the Nifty has corrected by more than 10 per cent on 16 occasions, including the global financial crisis of 2008. Historical data show that the market tends to recover within one, three or six months after this steep correction. During these phases, the Nifty corrected by 14 per cent on an average and the correction lasted 58 days. Yes, that's it, corrections don't last very long nor do opportunities. The recovery is swift and the window of opportunity does not last more than two months at best.
Even now, most fund managers I speak to tell me that the near term looks challenging thanks to outcome of elections in the key states of Madhya Pradesh, Rajasthan and Chattisgarh. But data also show that markets are not driven by politics but earnings and growth.
Like the current one, most of these phases of correction were largely challenging macroeconomic conditions. Given that India relies on imported crude oil, any big shift in crude prices impacts India's macroeconomic fundamentals, but these phases don't last forever. And Indian equities tend to fall more sharply than those of the US, China and other emerging markets when there is a global correction. However, the recovery is also swifter, too, for Indian equities.
So what leads the recovery after these bouts of corrections? The answer clearly would be large-cap stocks or the bellwethers. The recovery is largely led by large-cap stocks after a phase of correction. While the rupee has weakened and the macroeconomic conditions have also deteriorated as oil prices spiked, there is good news, too. For starters, the earnings season has ended on a positive note. Nilesh Shah, CEO of Kotak Mutual Fund tweeted, "48 Nifty companies have reported September 2018 results so far. Headline earnings growth is 10.1%. Removing Tata Motors, ICICI Bank and Bharti, earnings growth moves to 18.5 per cent. Earnings recovery visible from December 2017 is slowly building up."
Data show that the correction in the top 43 stocks from their 52-week highs is less than 10 per cent. Other indicators also suggest that on-the-ground situation seems to be getting better (see the table). Capacity utilisation of companies is up from 71.6 per cent in June 2013 to 75.2 per cent in October 2018. Industrial production also seems to be stabilising. The trailing price-to-earnings multiple of Nifty 50 at the end of October 2018 was 25 times compared to 27.6 times in December 2007 and 18 times in May 2013. All this suggests that the correction may well be an opportunity to pick up quality names now.
|Capacity utilisation (Mar '18)||0.917||71.6% (Jun-13)||0.752|
|Credit growth (as on Sep 30, '18)||0.22||0.144||0.136|
|ROE Nifty 50 (Oct '18)||0.255||17.1% (Mar-13)||0.13|
|Net FII Flows (12M until Oct, ` cr)||71952||125110||-26317|
|IIP (Aug '18)||0.135||0.01||0.043|
|GDP growth (Apr - Jun '18)||0.096||0.064||0.082|
|Source: Bloomberg, Axis Capital. Accessed from 'Market Outlook November-2018', Kotak Mutual Fund.|
The author is the editor of Value Research Stock Advisor.