CRASH OF THE SENSEX - MAKING SENSE OF THE CARNAGE

By Ruma Dubey

After a languid holiday yesterday, moods were still kind of lazy. But all were woken up rudely with a kick and a tight slap as the Sensex crashed, faster than the force of gravity.  A crash of over 750 points and all started scrambling for news which had caused this crash.  There were doomsday predictions all around, very somber and scared looking analysts, all advising to stay away. There were ominous statements, “When the Bank Nifty slides over 5% and over 70% of the bank stocks trade below the book, surely the writing on the wall is – there is deep trouble in the economy.” Is that a new knowledge? Something we all did not know about?

So what really caused this mayhem on the streets today? It was actually a combination of many factors:

1: Falling rupee, which briefly went and kissed Rs.62 and then withdrew

2: Overall mood of pessimism, with no policy action expected and mere bad politics to happen over the next few months

3: The moves of RBI on Wednesday to tighten liquidity to stem the falling rupee really spooked the markets and there was palpable fear that if the rupee falls further, RBI might put controls on FIIs too. RBI issued a clarification that it has no such plans but it was too late, just a few minutes before the markets closed.

4: The fear that QE withdrawal will be announced soon and FIIs will leave India, lock stock and barrel.

5: The market expects RBI to announce a rate hike any time now and rate sensitive stocks fell.

Essentially, these five fears played on the minds of all – traders, the rare breed of retail investors and institutions – FIIs as well as DIIs who sold en masse today. All these fears are not baseless and yes, QE withdrawal is a reality, FIIs will sell; yes, rates could get hiked as inflation is out of control and rupee slide will get stemmed only if current account deficit situation comes under control. There is an air of hopelessness with politicians squabbling and paying no attention to the shambles in which the economy is in today.

But then the question which we need to ask ourselves is – can the markets fall into an abyss? Is India a banana republic? Today, things are bad but deep down in the heart, isn’t there hope that maybe the new Govt might improve things?

Always, when markets crash like this, there is short covering which will happen. We are sure to see recovery soon. It is never a one-way street to the south. But the recovery could be in spurts and smaller than the fall. This is how it will be till we get clarity on QE withdrawal. This is an event which is inevitable and once it is known how much and when this withdrawal will start, some stability is sure to come in.

And this fear of FIIs leaving India? Yes, they will sell but it will not be like an exodus. India remains an opportunity for FIIs and if some leave, others will enter to take advantage of the lower valuations. The Indian economy, irrespective of its ugly face today, remains attractive compared to others in the emerging markets.  Or else, why are Walmart, Ikea and the rest of the world wanting to set shop here despite all the factors? This logic of identifying all stocks which high FII holdings and then selling them makes no sense. If there is a 30% FII holding in a particular stock, it is unlikely that entire 30% will get sold out. If one FII sells, be assured, someone else will buy.

So does this mean that we should take advantage of the carnage? Absolutely! For a trader, the situation is like quick sand but for an investor, this adversity could prove to be an opportunity. As we say always, take long term position in solid stocks. Buy in a staggered manner. Identify the strong portfolio/multibagger stocks and buy in small quantities at every fall.  The fall could be protracted and recovery could be a long way off. But if your vision is the long term, next five years, shouldn’t this then be the best time start a SIP? 

The day we feel that India is a goner, there is no sense of governance and there is no hope, only then can stocks fall through the floor. Today, we rave and rant and crib about the non-working Govt but we still have a hope that things will improve next year? That is the hope on which you should bank now and look for opportunities in a bloodbath like this.