If you have been watching the news, it might all seem like there is no bottom. But then, should you hit the panic button?
Sure, stocks are have gotten slammed. A bulk of the mid- and small-caps have seen their gains evaporate. These indices have lost more than 10 percent since the beginning of this year – and losses are higher for stocks not in these indices.
From lofty places, mid- and small-caps have lost 18 and 27 percent from their 52 week highs, and are closer to 2018 lows.
Large-caps have held some ground. But in the last few days, the bellwether, too, has lost. The Nifty 50 seems has tumbled over 180 points, or about 2 percent.
The rupee has crashed to an all-time low. Bond yields are rising, and has crossed levels of 7.95 for the 10-year g-sec. Whenever interest rates rise and rupee falls, stock prices go through an upheaval and that is exactly what is happening now.
The big question is: what next? Should you be worried and cash out? How much correction will we see? By historical standards, stocks are expensive. In fact, quite so. The Nifty 50 is trading at a trailing PE of 25.73. That’s still too expensive. The Mid-cap 100 index is at 47; the Small-cap 100 at 73.03.
In other words, you are paying 25 times for the Nifty’s current earnings, 47 for mid-caps and 73 times for small-cap earnings. Even if we assume earnings will grow at 20 percent that would still mean a PE of 20 times a year from now in large caps.
So, what are the possibilities of capitulation? Either earnings has to rise more rapidly, or prices fall, or we see a bit of both.
Earnings growth is concentrated in a few pockets such as consumption, autos and private banks. PSU banks are recovering, but as loan growth has slowed, incremental earnings will be slow to come. Bond yields have risen, which means PSU banks will have to provide for treasury losses.
Oil and gas, another big sector, could see their recovery stymied as oil prices are rising. Telecom is struggling. Pharma is not out of the woods yet, though prices are quite low. So, the only consumption led growth is happening in white goods, autos and private banks. But that’s not enough to lift the overall market’s earnings up in a big way.
So, one thing is for certain: stocks will remain under pressure over the next few months. While the first quarter results will be closely watched, savvy investors are not likely to be in a tearing hurry to make fresh investments.
While the bellwether indices may remain steady as mutual funds re-jig their portfolio and remain tilted towards the more liquid and steadier large caps, small- and mid-caps will be teetering constantly. You could almost say with certainty that the multi-bagger-like returns in small stocks in the past few years is now a thing of the past.
That said, where is the market headed? Going by historical standards, stocks could stabilize at a PE of 20. That means a bit of earnings increase in the June quarter with some correction could see large caps hovering 10000 levels for sometime.
Additionally, mutual fund SIP inflows are like a soft landing pillow. Even if the market were to correct, it will hardly capitulate.
But stocks are pricey no doubt. Remember, there is always an element of risk with investing now as the markets are high. So now is the time you might want to play it safe when choosing stocks.
Trading is a big no-no. And with cash you can afford to lose. If you have a conviction in the stock you own, ensure that you are prepared to average down your buying price as it slips. And because stocks are pricey, be prepared to hold them for a bit longer to get better returns and reach your target.
