01/04/2023
All crises end up with financial crises
Hi,
Let me first take this opportunity to wish you all a very happy and prosperous FY 23-24. Hope your health and wealth remain fit and grow. History says that any crisis, be it diseases, war, natural disaster etc. will land on the lap of banks and end with the intervention or financial engineering by central banks. This time will be no different, and looks like its still far from over. Mainly because Central Bankers are still in denial stage claiming things are fine and under control. Central banks even after the collapse of SVB and Signature Bank in US and Credit Suisse in Europe are talking about no big problem in banking and they shall continue on the path of rate hikes ,while we all know that SVB had been victim of a fast rate rises. Let's confess that most of the analyst would not have thought of such high pace of rate rise and we may have a lot of MTM losses on debt products sitting in many banks. Bigger banks which are systematically important and with huge deposits and wide geographical spread can tide over the crisis and maybe grow much stronger with attraction of more deposits or more merger opportunities leaving the weaker ones file chapter 11.
Central bankers have learnt a lesson from Lehman fall 15 years back that action must be swift and money should be immediately put to work rather than allowing contagion to spread and they have done commendable job at SVB so as to avoid any significant run-on bank ,though depositors will not trust and withdrawal will be big for some time . In this fiasco many equity and quasi equity (AT1 Bondholders ) are taken to cleaners and mind you these AT1 bond holders are many Pension funds and Insurance companies. Also by providing safety to deposits above 250,000$( fed insurance limit ) wrong signal was sent that all deposit holders money every very is safe, although Mrs Yellen later on confirmed that this is not the case and steps will be taken as situation demands
In spite of all this Fed wants to see inflation fading and unemployment cooling to take any concrete call on stopping and reducing rates. While inflation will definitely drop purely because of the base effect and cool off in energy prices surprisingly unemployment data is still stubbornly high in spite of so many layoffs announced by IT. Our estimate is other areas especially infrastructure is doing good and employment generation there remains firm.
Credit default swaps of many banks and corporates are rising and volatility has increased a lot especially in the US and Europe latest example being Deutsche bank. It seems to us that next 3 to 6 months are going to be very very tricky and one must be very cautious on risky assets and any deployment in such assets should be very sensible and gradual. Hedge funds world over are active on short side and biggest investors ( Mr Warren Buffet ) is sitting on the sidelines waiting for opportunities.
How should an Indian domestic investors navigate such situation?
Many people have started recalling Lehman event and screaming for big fall in Indian Indices 40/50 percent.While there is fire in neighborhood , we won't be spared, FII's have been selling in India since start of the year and they have sold close to $10 billion in the last three months and even post this they hold a lot more and may sell out of no choice since they want money in their home country and Indian is still relatively expensive, now maybe 5 to 7% more and that makes good decision to sell here. Clearly if Indian investor pull their legs and start redemption , our lone fighter DII will have to trigger sell button and we may fall. But as of now most of the DII's are sitting on 5/7% of cash across all equity funds which is till north of 75000/80000 cr and that's a lot of ammunation. Indian mentality has been not to sell on losses and even though SIP may reduce but withdrawals may not be big at lower levels is what our sense is.
For India, macro looks to be in great shape with
1)demand for credit at almost a decade high
2)bank npa's at the decade low
3)bank balance sheet pretty much sound and lending culture improved
4)government spending smooth due to healthy direct and indirect tax collection
5)oil below $80 versus 85 estimated for FY 24 in the Union Budget
6) Forex reserves north of five 575 billion $
7)inflation at 6% almost at upper tolerable band
8)dollar depreciation last year at the rate for 4/5% ( considering the global events that unfolded last year we consider it to be very reasonable).
All these justify the valuation for this country . But a global recession and a longer one can derail this .However the most important difference between last recession versus current situation is, last time before Lehman, Indian corporate balance sheets were leveraged , rampant loans were given by Public sector banks, FII dominated equity market, Forex kitty was low , all this makes us believe that we are not going down to such a massive correction. Bear market are painful but of short duration of with avg of 15/18 months. US is already passed one year and similar is the case for India. However Indian correction has been time wise but not price wise and there may be a chance, although low that in the next 3 to 6 months we may see the sharp pull down.
While we all jump into equity with long term investment mindset and wow to invest more at low levels , when actually low levels come our mind gets clouded with short term noises. One cannot deny the presence of negative news and prices have to discount them and come off, but one should appreciate that prices don't come down on their own they need reasons. That's the time one should have faith on their investment strategy and go back to history and see for oneself and conquer the fear. Of course mistakes need to be rectified and pain should be swallowed but the asset should find its due place in the portfolio. In our view whenever this dust settles India would come out far stronger and bigger. Our recommendation will be to continue with your sips and if possible try to increase or top up on falls . With earnings expectations of 1000/1050 rs for FY 24 for nifty companies, 15/16 times is the lower band at which Nifty has traded. So 16000 or below is the junction where one can think of becoming aggressive , not to say that 16000 will come but if it comes one must try to grab that opportunity.
Happy Investing and Happy New Financial Year once again!
-CA JAYESH GANDHI
Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.
