SBI Result shock & future of Stock Markets for FY18-19

Markets climbing higher got shocked by close to 5000 crore loss declared by SBI, adding to volatility in the markets. Reasons to stay invested, how SIP’s are at advantage when volatility exists. Reliance Tax Saver, the best of high volatile schemes which suits the best for SIP investors.

Why markets will not go down further yet with high volatility and setting pace for the next big bullish ride, pre & post election 2019.

SBI reporting Loss & the Message it Sends…

SBI reporting loss in its December 2017 results after 17 years of profits was a shock to the markets. At a time when the markets are giving off gains made in the previous year, worries arise in the minds of investors when big names bring shocks.

Indian stock market had a great run last year supported by all the external factors like Geopolitics, environment, climate, Government spending, etc. The only non-support area was companies yet to show profit growth in their Balance Sheets.

In this condition, loss reporting by SBI, brings uncertainty on the profit growth of India’s businesses. Is the low or negative growth only in one company, sector or is it in the whole economy? Knowing this will help us take decisions on whether to be invested into the markets, add more or stay away.

2229 companies have reported Dec 17 results so far. Among them sales has grown by 5.24% & profit growth was 12.31%. Clearly showing that the economy as a whole is not growing. They have been managing to get higher profits by cutting down expenses. In one way it is good because, when business grow from here, they will have higher profit margins.

If suppose, sales takes time to grow, cutting expenses further will lead to lower salaries and people will have less to spend. Economy will become flat.

There is an immediate need for the consumption to pick up. If everyone is saying no sales, thought comes as to, why sales are not happening? Are people not spending money?

It is said that, inflation is low, blue collar salaries are increasing, economy is growing. Then where is the money going? Is the whole population saving without spending? If that is truth, there is a new challenge to deal with.

We have Japan as an example. They saved so much that, now if they keep money in their bank, bank is charging them a fee. There are no borrowers, only deposits. Instead of lending money and earning an income, banks have now become safe keepers for people’s money.

This is the reason that Japan is now financing projects outside their country at ridiculously lower rates. Our bullet train project in Gujarat is financed by Japan. 80K crores finance with technology which we will start repaying only after 15 years and can take 35 years to payback. The interest is 0.10%. It is an advantage for India as we need not worry about the cost of this loan.

When more and more money goes into the affluent people’s hands, only savings get increased. Hence the government’s push to concentrate on increasing income for Blue collar jobs, who will spend and bring consumption.

Does this mean, opportunities for investors have come down?

There are businesses which have been growing, only that investors have the responsibility to identify them and invest. One cannot invest into any other stock & expect returns from his investment. So, be selective when selecting your stocks for investment.

As we are publishing this article, almost all other public sector banks have reported huge loss on their Dec 17 results. Upon this is the RBI directive to move about 2 lakh crores of bad loans to Bankruptcy Court. More pain coming to PSB’s which is bringing out their real worth.

SENSEX at 33000, our portfolio takes rest

Government announced 2.11 lakh crores of support to the PSB’s, market goes berserk. PSB stocks like SBI, PNB goes up more than 30%, PNB made 46% gains. Private banks took a hit, NBFC’s which were leaders lost big value. Broad indices move up a percent and our portfolio goes down a percent. After having had continuous out performance, which saw big alpha generation against the benchmarks and our portfolio. Now the reverse has began to happen.

NBFC stocks had big run up, which stretched their valuations, now probably the market is selling them to accumulate PSB’s. In my opinion, just infusing capital cannot take a business out of mess, unless the management is responsible. One more thought that I heard from the markets, banks get capital from Government and soon there is election and they will have to waive off farmer’s loans, which will eat up 61K crores.

Ultimately, Government is playing, using the banks as a tool. With the kind of moves that the banks had today, it brings concern on the future rally in the markets. Mutual Funds having exposure to banking stocks will show enormous gains tomorrow, while the same will not stay for long as what goes up has to come down too. And here, there is no real value, so the fall will also be drastic.

Liquidity from retail participation has been driving the markets where the earnings have been subtle, now the current move to breach 33000 on the SENSEX will bring in more investments. People who were waiting on sidelines will take a plunge, just to ensure that, they don’t lose even more opportunity. And this money is coming into the markets after seeing the gains of the past 12 months, expecting that the same will repeat. Even a slight unsteady move from here, the same retail money will become a pressure to the fund managers as they have to sell to meet redemption requests.

Then, they will go out and complain that Mutual funds are not good investments, it is a gamble.

We have been waiting for a correction since 7 months now, the markets have defied expectations and gone far away. Now, if it has to fall in place, the impact will be high too. Looking forward to some challenging times in the coming months.

Not in a hurry to turnaround……

Slow TurnaroundThe Indian stock markets which had an euphoric rally in 2014, turned down in 2015 and is looking to have another negative year in 2016. Price increase in stocks are always backed by earnings growth, and when earnings show a slowdown, price moves either get flat or decline based on the interests each individual stock has built in it.

In 2014, earnings growth was very good and it supported the price increase following which expectations got higher and it fuelled the valuations to get a little bit stretched. Once the reality set in to show that the expectations were wrong, rather it was in fact the other way around, a slowdown in the growth rates, investors were in for a surprise. All of a sudden all the buy orders became sell orders and hence the larger fall we have had in the markets post Chinese market crisis.

Automobile companies which were leaders in 2014 began to slow down on their growth. Infrastructure restructuring which was expected to be big and to support the banking sector, has been taking more than the anticipated time to get on the roads. New sectors that began to show strength were NBFC’s and Pharma along with export based businesses. Each one went on to face its own challenges. As spending declined, which has been shown in the top line growth of the Indian businesses in their December financial results, with sales growth in the lower single digits and profits showing an increase which means, companies have resorted to controlling operations to increase profits, which is also a negative in a growth story. Controlling operations expenses cannot continue for a long period. Without sales growth, it will bring in more challenges. This facilitated the weakness in the NBFC sector. USFDA played the devil’s advocate to pharma companies, big names in the Pharma space began to fall like nine pins. Between 20-30% drop in prices of stocks like Dr. Reddy’s Cadila, Cipla etc.,

Exports sector went into a different challenge, external forces played against them, all of a sudden they become un-competitive to their markets following the devaluation of Chinese currency. Orders began to slow down and some of the prominent stocks have lost more than 50% from their peak price.

With big time damages done to the markets, Indices Nifty and SENSEX breached their near term supports and turned bearish. Within few months what was the world’s best economy became the opposite. Now, it will take a little longer than anyone could guess for the markets to turn around. Government through its next arsenal, “THE BUDGET” looks like not to give any big fillip, with just a couple of days for the budget, markets don’t show any kind of strength. Next triggers can come only from the Q4 results, which already shows weakness as banks like SBI have announced that, they are going to show more bad loans in their books.

The best way to approach the market at these troubled times is to wait on the side lines, ready with funds to take the next opportunity early on. In our portfolio for our clients, we have liquidated most of our holdings baring very few best performing stocks like Bajaj Finance, Pidilite etc., Being invested in short term debt will help our capital grow at nominal rates till the next opportunity arrives. In Equity investing, if we deploy this method of getting in when the markets are strong and out when it is weak, it is possible to outperform the benchmarks over a longer period. Hence, again it gets proved that, buy and hold will not be the best strategy in Equity investing. It can only give returns to the extent of that which is got from FD’s. Rarely one can find stocks that have given super normal returns on a continuous basis for decades.

Take a look at your portfolio and do a churn of holdings wherever required and be in cash to take the next opportunity.

27 PSB’s lost 1.14 Lakh Crores in 4 years.

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27 Public Sector Banks have written off 1.14 lakh crores of bad debts in the last 4 years. Here is the efficiency of the banking sector in the hands of the government management. It is disturbing to realize the poor condition our banks are being managed. On the other hand the private sector counterparts are doing good business. What does this mean? Very poor competency among the PSB management, next to zero responsibility in delivering results.

Couple of days back there was a question to me; SBI has come down to 200 from 320, can we buy? The reason behind this thought was that, the SBI stock had been at a higher price very recently, now it has fallen and hence it is cheap. The answer I gave was, the price was at 320 was for a reason and it is the same when it is at 200, now. It is not cheap. In a couple of days from this discussion, SBI stock price came to 160, and again there was the question, now that it is at 160 can we buy now?

What this indicates is, that people of India have developed so much confidence on this bank; it has been part and parcel of their life for generations. Little do they know that, what was in the early days is history, there was no competition, though the management did not have the competency or responsibility, they had the advantage of opportunity at their hands, they got some of the best and some that were useless too, on the whole they made money.

Now the situation is different, private banks are giving this irresponsible bank management a run for their money. All the quality assets have gone to the private players because of the quality and service they provide. Now, the left over business is crap and that is where these PSB’s are rolling their funds. Very soon all the confidence that the citizens of India have on SBI or the PSB’s on the whole will vanish into thin air.

In our portfolio, we don’t have banking exposure since 2013. It was very early for us to move away from banking investments, the reason we got out was because our system did not qualify banks for investment, and their growth was fairly lower in comparison to companies that were showing super strong growth. Hence, our investments moved to those quality assets and now, when the whole market is weak, our portfolio is even more safe as we have moved off from equity exposure to a fair extent, thus keeping the capital protected in times of turbulence.

Our portfolio is 30% in Equity and 70% in short term debt, making the capital safe when the markets are weak.

In a young investors mind……

One good question on Quora that interested me and for which I wrote a lengthy answer, it can be helpful to many small investors who think Mutual funds are not good investment assets.

Venkat Chitteti

Hi Deiva Ramesh, Today you answer my question 25 years IT employee from middle class family investment. One of my friend suggest me this, Kotak Mahindra Bank (3 in one) Savings Account cum Trading Account. It has a good research team. Every month save some amount from your salary and deposit in Kotak Mahindra Bank. Slowly buy 4 SBI shares every month. Later if you get a promotion you can start investing in Mindtree and ITC. L&T is also a good stock. Do not invest in Mutual Funds.

Answer

Deiva Ramesh

Mr. Venkat,

At first, thank you very much for your compliments.

Why do we invest, any investment for that matter?

To grow our money right?

We go to stocks assuming that we will be able to grow it much faster and know that there is a little higher risk involved to attain this goal.

Now comes the quantification of the risk. How much risk you are willing to take?

At the most about 10% of your capital or a little stretched up to 15%. Assume that you have invested 25k on a slow process and you find your investment value is 20k, will you still have the same enthusiasm to put the next month’s investment into the same stocks?

I doubt.

Mind will naturally check to see other alternatives, probably another stock or maybe even other asset class. Once a person reaches this stage, his tracking of the previous investments will fade and over a period, it will be junk investments.

And in case of employed people, no one can guarantee that they can give the same attention to the events in their life as they give at any particular period.

Again even this is pretty much natural for any human being.

After a certain period, you will lose interest and the investment will be losing more due to loss of time value.

One can just not park money into something without knowing how it will be 6 months down the line, a year from now etc., if there is no clarity, he will end up losing the investment.

I have a client of mine; he is emotionally connected to investing in L&T and SBI. For the past 8 months, he has been buying both these stocks; L&T from it was 1850, now it is 1450. SBI from 280 and now it is 240.

Of all the stocks why these two?

On the back of the mind, there is a thought, these are pretty good companies, even if India has to collapse, these companies won/t collapse.

He used to regularly put 10K each month, now he has slowed down.

Having investment in few companies is more higher risk, and in today’s context there are retail investors coming to the markets to buy large cap stocks, just because they feel that the valuation is pretty low than what they had seen just a few months ago.

For some companies that have good fundamental strength it is true, they are available cheap now. While it is not the same for many front line companies.

30% of BSE 500 Companies available at 40% discount.

There was an article in Economic Times on the above topic. 40% discount is a big number, how should we see this one? Is this discount an advantage or worrisome?

goldbear_npMost of the companies that have lost big time in the recent weakness are from the Metals and Banking sector. Metal stocks have been the mostaTeoRR7T4 hit with some stocks losing more than 75% from their peak prices. Metals or commodities as they are wildly said have been very poor performers worldwide. The reason behind this is China! Does that mean the whole world has been dependent on China for their commodities business and if that is true, China had been buying raw materials from across the globe to feed its mammoth manufacturing facilities? Which also means that, the world has given itself fully to the dragon.

 

How things will change from here and make this crisis situation an advantage is not very clear for now. Whereas, such high level of dependency on China is not a good one. If it is continued, such turmoil’s will repeat. China’s forex reserves have taken a nosedive as the government has resorted to dollar selling to keep the Yuan safe from sliding down. This will create one more problem, if China has to purchase all the raw materials available in the world, it has to pay in dollars. Will it resort to some other game plan to meet that requirement? It is very early to comment on these ideas.

bank-collapseFor the banking sector the woes are much higher. Banks have not only lent to the core sector like metals which are in doldrums, it also has good exposure in the infrastructure segment, which is another big bottle neck.

When Modi government came to power, infrastructure was expected to be of highest attention and priority of the government, where, there seems to be an abrupt neglect. Our country needs infrastructure to grow faster, why we are not taking bolder steps here is not known. As the lending to these two sectors along with all the existing mistakes the consortium of public sector banks have created are building up huge NPA’s, Banking sector is not likely to see a turnaround in a shorter duration.

Housing sector has seen slow down, Automobile purchases are showing down tick and these are the segments were banks have big exposure too. When the industry is not taking loans, retails is becoming tight, Banks cannot perform better.

So, no wonder that both these sectors lead the wealth destroying mela in the markets. Investing in them just because their stocks are quoted at lows will only result into long term dormancy or investment suicide. Yesterday I had one of my clients ask me about investing in SBI, because he sees the stock is cheap. This thought is normal, because for us Indians, SBI is a behemoth at least that is what we think about. Our Grandfathers had accounts with SBI, which means it is trustworthy. Yesterday SBI hit its 52 week low. Any stock that reaches for a new low goes there for a reason; they rest in peace for some time and only then start their journey upwards.

When markets go down, which is a natural process, how much our portfolio has taken the impact is what everyone who has invested in stocks think about. Going by emotions and sentiments if someone has invested into stocks like Tata Steel, SBI, PNB, Jindal Steel, Tata Motors etc., they are doomed for failure. Always, investing in the sectors that are in the limelight for their performance is the good one, when it comes to investing.

In our Bravisa Temple Tree portfolio we don’t have a single stock in both, Metals as well as Banking sector. We were not biased in taking this decision, it happened as a natural process as our research application did not give out such names for investment. Following the very simple principle that we will invest in only those companies that have good sales as well as profit numbers has eliminated these stocks from our list. When in 2014, the markets made a big rally with most of the participation coming from the banking sector; there were thoughts in the back of the mind, “Have we missed something?”  It was good that we struck to our rules, now; it is getting proved that our decision was right. The damage that both Metals and Banking sectors have created in the market will take time to ease out, which in the process will also bring down valuations of those companies that are fundamentally good. Once the dust is settled, and the market begins on a renewed rally, the fundamentally strong stocks are the ones that will lead the market rally.

Feels good, that we are placed right.