anatomy of a bear market…...kal aaj aur kal… kal..the great fall of 2008; where are we now?...

Anatomy of a bear market…

Phir teri kahani yaad aayi.... We have seen it earlier too. In 2000 and 2008 also, the equity market corrected sharply across the globe. Indian stock markets retraced by 60-70% in previous severe global corrections. The carnage in the broader markets was all the more severe !

Source: Bloomberg, Sharekhan Research

Kal Aaj aur Kal…

Kal..the great fall of 2008; Where are we now?

Nifty finds bottom at PE of11-12x trailing earnings and we are still at 20x now. BUT the valuations are close to bottom at 2.3x on a price-book value P/BV basis!!!!!

25.3 24.8 24.8 25.6

20.0 18.0

20.0

22.0

24.0

26.0

28.0

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Nifty P/E (TTM)

Nifty trailing P/E (Mar 19 – Mar 20) Nifty trailing P/E (Dec 07 – Dec 08)

22.5

17.2

14.2 14.1

11.4 8.0

12.0

16.0

20.0

24.0 D

ec-0

7

Jan

-08

Feb

-08

Mar

-08

Ap

r-0

8

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-0

8

Dec

-08

Nifty P/E (TTM)

Nifty trailing P/BV (Mar 19 – Mar 20) Nifty trailing P/BV (Dec 07 – Dec 08)

5.7

3.6

3.1 2.9 2.2 2.0

3.0

4.0

5.0

6.0

Dec

-07

Jan

-08

Feb

-08

Mar

-08

Ap

r-0

8

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-0

8

Dec

-08

Nifty P/BV (TTM)

3.0 2.9 2.7

3.0

2.3 2.0

2.2

2.4

2.6

2.8

3.0

3.2

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Nifty P/BV (TTM) Source: Bloomberg, Sharekhan Research

Kal..the great fall of 2008 where are we now (on forward earnings)?

Nifty forward P/E (Mar 19 – Mar 20) Nifty forward P/E(Dec 07 – Dec 08)

Nifty forward P/BV (Mar 19 – Mar 20) Nifty forward P/BV (Dec 07 – Dec 08)

18.2

16.3 16.3 17.4

13.8

10.0

12.0

14.0

16.0

18.0

20.0

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Nifty P/E (1-yr fwd)

2.7

2.4 2.4

2.6

2.0

1.5

2.0

2.5

3.0

Mar

-19

Ap

r-1

9

May

-19

Jun

-19

Jul-

19

Au

g-1

9

Sep

-19

Oct

-19

No

v-1

9

Dec

-19

Jan

-20

Feb

-20

Mar

-20

Nifty P/BV (1-yr FWD)

19.0

14.5

10.1 10.6 9.7

8.0

10.0

12.0

14.0

16.0

18.0

20.0 D

ec-0

7

Jan

-08

Feb

-08

Mar

-08

Ap

r-0

8

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-0

8

Dec

-08

Nifty P/E (1-yr fwd)

3.9

2.9

2.1 2.0 1.6

1.0

2.0

3.0

4.0

Dec

-07

Jan

-08

Feb

-08

Mar

-08

Ap

r-0

8

May

-08

Jun

-08

Jul-

08

Au

g-0

8

Sep

-08

Oct

-08

No

v-0

8

Dec

-08

Nifty P/BV (1-yr FWD)

On a forward earnings basis, the Nifty is still 15-18% higher than the bottom in 2008 both in terms of PE and PBV valuations


Aaj....Market cap-to-GDP ratio: We are not far from bottom?

Market cap to GDP ratio at 50%, is significantly lower than the long-term average of 80% and close to 2008 global financial crisis.


50.0

66.4 70.7

90.2

64.9 72.3

84.0

65.0

83.5 78.4

85.4 80.6

45.6

149.7

77.6

60.5

49.0 40.5

Mar

-20

Dec

-19

Dec

-18

Dec

-17

Dec

-16

Dec

-15

Dec

-14

Dec

-13

Dec

-12

Dec

-11

Dec

-10

Dec

-09

Dec

-08

Dec

-07

Dec

-06

Dec

-05

Dec

-04

Dec

-03

Market cap –to-GDP ratio (%)

Aaj... Earnings yield getting attractive, but may not have peaked!

0.5

1.0

1.5

2.0

2.5

Mar

-05

Sep

-05

Mar

-06

Sep

-06

Mar

-07

Sep

-07

Mar

-08

Sep

-08

Mar

-09

Sep

-09

Mar

-10

Sep

-10

Mar

-11

Sep

-11

Mar

-12

Sep

-12

Mar

-13

Sep

-13

Mar

-14

Sep

-14

Mar

-15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

Sep

-19

Mar

-20

Nifty Yield / G-sec Yield (EY/BY) had spiked during the Global

Financial Crisis (GFC)

Nifty earnings yield (1-year forward)/G-sec yield at multi year high

EY/BY which had spiked sharply during GFC, and has

risen again due to the present COVID-19 crisis, highest since

GFC (now at 1.3x)

Due to recent market corrections, the relative attractiveness of equities vs bonds is increasing. The Nifty’s earnings yield is now fairly close to the 10-year bond yield, which suggests the rising attractiveness of equity versus debt.

It remained below 1x for most of the period in last six years (except during demonetisation). Historically, when the earnings yield is near to the 10-year bond yield, it has been a good indicator of a Nifty bottom.

LT average: 0.8x


Aaj...FII outflow in YTD FY20 is higher than FY19 & 80% of FY18

-100,000

-50,000

0

50,000

100,000

150,000

YTD FY20

FY19 FY18 FY17 FY16 FY15 FY14 FY13 FY12 FY11 FY10 FY09 FY08

Rs.

cr

FII flows (Rs. Cr) DII flows (Rs. Cr)

Source: NSDL, Sharekhan Research

Phir kal.......Handsome returns post sharp corrections

-37% -30%

-60%

6% 20%

9% 14% 13% 7% 23%

11% 34%

79%

-4%

92% 103%

405% 387%

-100%

0%

100%

200%

300%

400%

500%

Asian Financial Crisis Dot Com Bubble Global Financial Crisis

Trough 1M post Trough 3M post Trough 6M post Trough 12M post Trough Peak


Market recovers ultimately, providing multiple attractive opportunities

0

2000

4000

6000

8000

10000

12000

14000

Mar

-08

Jun

-08

Sep

-08

Dec

-08

Mar

-09

Jun

-09

Sep

-09

Dec

-09

Mar

-10

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Mar

-12

Jun

-12

Sep

-12

Dec

-12

Mar

-13

Jun

-13

Sep

-13

Dec

-13

Mar

-14

Jun

-14

Sep

-14

Dec

-14

Mar

-15

Jun

-15

Sep

-15

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Dec

-19

Mar

-20

May 2016, Markets jump back 10% in 1mth

April 2011: Swift 13% recovery in next two months

Aug 2009: Sharp 83% jump from lows within 6 months

Sept 2013: Market bounce back 15% in next one month

Mega stimulus

Sept 2008: US Sub Prime Crisis, market falls steeply by 43%

Dec 2010: Euro Debt Crisis emerge, Markets correct 11% in next two months July 2013:

US Quantitative easing worries mount market corrects 10%

Dec 2016: DEMO effect Nov 2016, market fall 9% after that

Dec 2015: US First rate hike since 2006 markets down 10% in 2 months

Coronavirus Scare/ Oil Crises

Sino-US Trade war, domestic slowdown


Nifty: Excluding Top 20 the Next 30 already at 5750 Nifty level

Nifty Top 20 delivered consistent outperformance

-

50

100

150

200

250

300

350 A

pr-

15

Sep

-15

Mar

-16

Sep

-16

Mar

-17

Sep

-17

Mar

-18

Sep

-18

Mar

-19

Sep

-19

Mar

-20

Nifty Top 20 Bottom 30

Bottom 30 Index : 5767, decline of

30%

Nifty 50 Index :

8967, Return of 10%

Top 20 Index: 10145, Return of 24%

Source: Capitaline, Sharekhan Research

Surviving market corrections …

How to survive in tough market conditions- Do’s

The market is under pressure amid the ongoing global sell-off and some stocks are available at much lower levels. But a lack of clarity on how big this cut is going to be, it is not advisable to go all out and buy. We believe that depending on the risk appetite and patience for investment duration, it is better to hold a higher cash position and only deploy money if you are a long-term investor. So now “Cash Is King”.

Investors should have dynamic assets allocation plans to maximise return potential at the same time minimizing the overall risks of the investment portfolio.

The top-performing sectors change in every bull market. It was banks and commodities that led the 1992 and 2008 rallies. Similarly, the FMCG, pharma and IT sectors were running the show in the 2000 and 2015 rallies. Investors should look at portfolio churn from the potential underperforming sectors to relatively outperforming sectors in this tough market condition. Its important to place a bet on the right sector at the right time to get a strong outperforming portfolio.

“Cash is King” ..

SABSE BADA

RUPAIYA…

“Dynamic Allocation”

“AAJ MERE PASS

GAADI HAI,

BANGLAA HAI,

BANK BALANCE

HAI..”

“SAHI TIME PAR SAHI

JAGAH HONA, SAHI TIME

PAR SAHI BAAT KARNA,

AUR SAHI TIME PAR SAHI

KAAM UTHANA, ISEE KO

LUCK KEHTE HAI..”

“Sector rotation”

How to survive tough market conditions- Do’s

Taking calculative risks based on individual risk appetite could deliver big return in long term. Investors should look for building long term super portfolio by accumulating quality stocks in current market weakness.

Investors should keep in mind long-term wealth creation in mind and without worrying about short-term pain. They should not break their long-term portfolios just because of short-term gains.

The events of the next couple of months are quite critical from the economic, healthcare and policy point of view. However, the outlook remains constructive for Indian economy for next decade, as we are already on road to become a $5 trillion economy. Not withstanding near-term uncertainties, don’t miss the big picture and don’t let near-term issues cloud your investment decision.

“Big Picture” “Take calculative risks” “Long-term wealth creation”

“RISK TOH

SPIDERMAN KO BHI

LENA PADTA HAI…”

“NAZDIKI FAYDA

DEKHNE SE

PEHLE…DOOR KA

NUKSAAN SOCHNA

CHAHIYE..”

“BADE BADE DESHON

MEIN CHOTI CHOTI

BAATEIN HOTI REHTI

HAI..”

How to survive in tough market conditions- Don’t

Taking overleveraged bets in a falling market could lead to huge losses. Overleveraged trading should be avoided in a volatile market condition, as there is high-degree uncertainty in the market. Its better to preserve capital.

Do not set a preconceived benchmark price for the shares you hold, in a falling market holding onto stocks, which do not have strong fundamentals and waiting for your buying price to come could result in heavy losses. Also, do not tend to average your investment in weak stocks. If the price drops owing to fundamental reasons, it is better to exit and book losses. Don’t keep false hope…

Avoiding Newsflows and corporate development in the company you have invested and sticking to own confirmation bias could prove costly. Discuss with your investment advisors and figure out, if anything materially has changed in the companies fundamentals from the time you have bought. Sticking to own confirmation bias in a falling market will only result in mounting losses…

“Keeping false Hope” “Confirmation Bias”

MERE KARAN

ARJUN AYENGE… “MAIN APNI FAVOURITE

HOON..”

“TUMSE NA HO

PAYEGA..”

“Don’t overleverage”

Where to Invest Now…

“Successful investing is about managing risk, not avoiding it…” – Benjamin Graham

Where to Invest now?

Investment strategies in tough market conditions are a lot more complicated, given the pain of drawdowns and an uncertain outlook. In a bear market, “Cash is King”, so ensure that you have ample liquidity to use opportunities to buy good quality stocks for the long term. Additionally, investors should use a staggered approach to invest in the market as it would hardly show a V-shape recovery and tend to consolidate after a sharp fall over a long time. Our past experience suggests that investing in high-quality companies always pays in the long term and these would be the first to recover when the dust settles down. Further, a bear market provides ample opportunity for first-time investors to build a long-term portfolio. Thus, we have created three distinctive portfolios, keeping in mind the risk appetite of different sets of investors.

SAFETY FIRST APPROACH QUALITY FIRST APPROACH OPPORTUNISTIC APPROACH

INVESTMENT PORFOLIO

Safety First Portfolio

Conservative Approach - Limited drawdown, Reasonable gains

Allocation (%)

Conservative Hybrid Funds (Balanced Funds) 40%

1 Kotak Debt Hybrid Fund

2 ICICI Prudential Regular Savings Fund

3 IDFC Regular Savings Fund

Large -cap Fund (Do SIP or STP) 20%

1 HDFC Top 100 Fund

2 ICICI Pru Bluechip Fund

Alternate Asset (Debt/Gold) 25%

1 ICICI Pru Short Term Fund

2 IDFC Low Duration Fund

3 Gold ETF

Cash 15%

Total 100%

Quality First Portfolio

Defensive Portfolio with high Quality companies - Right Mix for Difficult Times

Allocation (%)

Consumer Staples 40%

Asian Paints

Hindustan Unilever

Dabur India

Nestle India

Pharma 15%

Abbott Ltd

Divi’s Labs

Others 15%

Mahanagar Gas

SRF

Bharti Airtel

Banking & Financials 15%

HDFC Bank

HDFC Life

Cash 15%

Total 100 %

Opportunistic Portfolio Take advantage of volatility to accumulate quality companies; investors willing to take short-term pain for handsome long-term gains

Allocation (%) Banking & Financials 35%

Kotak Bank ICICI Bank

Bajaj Finance

HDFC Life

Consumers 25%

Asian Paints

Tata Consumer

Bata India

Hindustan Unilever Trent

Speciality Chemicals + Gas 10%

SRF

Mahanagar Gas

Others 15%

Reliance Industries Bharti Airtel

Cash 15%

Total 100%

SIP Approach…Best way to beat market volatility

SIP Approach- Beat volatility, create long-term wealth

Despite near-term uncertainties and huge market volatility, investors who would stick to systematic investing plan approach over the next 12-18 months would be the biggest beneficiaries in the next 3-5 years. Investing in quality companies through the stock SIP mode as well as through the mutual fund (MF) route would create wealth in the long run. We have created two baskets for the same, one is for SIP in quality companies and the second one for SIPs through the MF route.

Mutual Fund - Equity Portfolio Category

ICICI Pru Bluechip Fund Large-cap

HDFC Top 100 Large-cap

Kotak Standard Multi-cap Fund Multi-cap

Aditya Birla Sun Life Equity Fund Multi-cap

DSP Equity Opportunity Fund Large & Mid-cap

Stock SIP Kotak Mahindra Bank Asian Paints Reliance Industries

Bajaj Finserv Titan SRF

What to Avoid…

Kaun Kitne Paani Mein..

What to avoid...Vulnerables In a bear market, the selling pressure can be relentless and pull down even the best of the stocks. However, it is important to understand which companies are more vulnerable in terms of an adverse impact on their business due to the Covid-19 outbreak and also other factors like balance sheet issues, negative free cash flows, promoter pledge, etc. We have carefully scanned through companies under our coverage. The following are the key conclusions of our study.

• Vulnerable market segments: Generally, it is prudent to avoid small-caps and stocks with relatively poor liquidity.

• Vulnerable sectors: Certain sectors are expected to see significant impact on their business over the next few quarters resulting in downgrade of earnings estimates and valuation multiples. Consequently, these sectors could be relatively much higher selling pressure and correction.

Vulnerable sectors:

• Consumer Discretionary: Automobiles, Retail, Hotels & Travel, Aviation, Building materials & Construction, Engineering among others.

• Export-driven businesses: Textiles, IT Services, Auto-Ancillaries.

• Banks & Financials: Weak banks and NBFCs owing to rising risk of NPAs and weaker credit demand.

What to avoid... Kacche Dhaage

0.0

100.0

200.0

300.0

400.0

500.0

600.0

Ap

r/0

7

Oct

/07

Ap

r/0

8

Oct

/08

Ap

r/0

9

Oct

/09

Ap

r/1

0

Oct

/10

Ap

r/1

1

Oct

/11

Ap

r/1

2

Oct

/12

Ap

r/1

3

Oct

/13

Ap

r/1

4

Oct

/14

Ap

r/1

5

Oct

/15

Ap

r/1

6

Oct

/16

Ap

r/1

7

Oct

/17

Ap

r/1

8

Oct

/18

Ap

r/1

9

Oct

/19

SENSEX Cap Goods Auto ConsumerDiscretionary

Sub Prime Crisis

COVID-19

Aviation & Travel Auto & ancillary Infra & Construction Hotels


Defensives better place than others…

There are certain sectors that are expected to do better than even in troubled times. • Consumer staples • Select pharma & specialty chemicals companies • Life insurance companies • Multinationals with high return ratios and a dividend paying track record

Saara Shehar mujhe Loin ke naam se jaanta hai…


“ Everything will be okay in the end and if it’s not okay, it’s not the end….

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anatomy of a bear market…...kal aaj aur kal… kal..the great fall of 2008; where are we now?...

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