8 Charts which Explain the Current State of the Market

Out of the 500 stocks in BSE 500, almost 75% are down for the year. What is going on?  I present 8 charts which help explain the current state of the market:

1. Oil Prices have risen sharply especially for countries like India who are large Oil importers. The chart of Brent Crude shows the steep rise of Oil price. The rise is especially sharp since mid-February.

Source: Bloomberg

2. Interest Rates are going up. The best indicator is the rising US 10-year Bond Yields. This hurts countries which have high Current Account and Fiscal deficit. The chart below shows that the US 10-year Yield has crossed the psychological mark of 3% recently.

source: Bloomberg

3. Most Emerging Markets have been down. The chart of the MSCI Emerging Markets Index shows that the Index peaked in mid January and since then has been falling.

source: Financial Times

4. Rupee has been weakening mainly due to rising oil prices, falling exports and falling inflows. The chart of USD/INR shows the steep depreciation of Rupee this year.

source: Bloomberg

5. Issues of Bad Loans have not been sorted. They seem to be getting worse. PSU Banks have been the worst performing stocks in the market.

6. Political Uncertainty has gone up: Karnataka has thrown up a Hung assembly. Is this an indicator of what could happen in 2019?

7. Earnings season has been good, but market seems to be pricing in the positives. For example, out of 810 companies that have announced results till May 20, 2018, 37 have shown “Outstanding” Financial Trend as per our Analysis. 23 of these 37 have fallen since they announced these results. Some are down more than 20%.

8. In my piece, 4 Implications of the Current Market Valuations, I had shown that the Current market is not cheap. Also, I had noted that When Valuations are high, the ability to absorb bad news becomes less. Using Benjamin Graham’s terminology, the Margin for Safety in the Market is low. This also means that in a period when news is unpredictable the volatility in the market can be high.

Given all of the above, What should we as Investors do?

If you are long term investor, these are the times that challenge the conviction especially if you are holding stocks that have fallen by 15% or more. This is a good time to revisit the original investment thesis and figure out if that thesis still holds.

For shorter term investors, it is important to note that the state of the economy or politics are very difficult to predict. Unfortunately, the best guess is that the difficult situation will continue for the short term.  In this case, it is important to make the portfolio a bit more stable.

Over the last few weeks I have presented a few ideas based on broader themes and trends which are examples to trying to Bullet proof the portfolio. For example:

A)  Rural Theme seems to be a structural play at this point. The announcement of a normal monsoon in addition to an increase in farmer income due to a 15% hike in the Minimum Support Price for crops could further help. One such sector which could gain from this theme is FMCG. In my piece : 4 FMCG Stocks to Play the Monsoon, I had presented some of the ideas in the FMCG sector.

B)  Another interesting theme is government spending on infrastructure. It is important to focus on those stocks which have low debt. One such sector which seems to be doing well is the Building and Construction sector. I had presented investment ideas based on the theme in my piece: 3 Short Term Ideas to BUILD your portfolio.

C)  Banking in India is a proxy for the underlying consumer growth and economy. Despite the recent spate of bad news in Axis Bank, PNB and ICICI Bank, the better run banks in the sector will remain to be great investment bets offering both the safety of size and strong underlying fundamentals. In my piece: The 5 Best Banks to INVEST, I presented the best banks to bet on. (Please note; Federal Bank has fallen a lot since because of the bad results and one may wait for the stock to stabilize before considering it) 

These are not the only ideas, you may have many of your own, but the point to highlight is that one needs to look at stocks which have high quality, with reasonable valuation and have some theme which will help the earnings to grow with a higher probability.

Would love to hear your feedback.