Thursday, August 1, 2019

Nifty drops below 11000, what to do now?

Thank God, July has ended. We have just gone through the worst July in the Indian stocks markets in the past 17 years! This chart (courtesy Mint) conveys the extent of the carnage on Dalal Street in July.

The selling in the month of July was led primarily by Foreign Institutional Investors who were spooked by the budget proposal to increase the Income tax surcharge for the super rich. This was compounded by sluggish earnings for the June quarter suggesting a serious slowdown in the Indian economy. Notwithstanding the Indian Government’s target to achieve $5tn economy by 2024 there were very few investors who were willing to bet on the Indian stock markets in July. The simmering NBFC crisis and accusations of tax terrorism only worsened the situation. In short, we have moved from a situation of joy and ecstasy in May 2019 after the Modi victory to that of gloom and doom in July – in just two short months.

As an observer of the stock markets I have noticed a more disturbing trend in the past 12 to 18 months – specifically, the Nifty is no longer giving a true picture of the performance of the broader market. In other words, the broader market is significantly underperforming the Nifty over the past 12 to 18 months. In order to confirm this hunch I used the icTracker database and computed the returns of each stock over the past 12 months (including dividends, bonus, etc). I then grouped the returns in bands of 10% ranges and counted the numbers of stocks in each range. I did this for two sets – the Nifty and for all the stocks in the database. I then calculated the count as a percentage of the overall stocks in each set and plotted the results as line charts as shown in the chart below.

Here are my observations of this chart

  • The line chart for the ‘Nifty’ is significantly shifted to the right of the line chart for ‘All’ stocks. This shift gives a visual picture of how much the Nifty stocks have outperformed the broader market
  • I have put colored areas in the graph to make my point more clearly
    • Green – Non Nifty Stocks that have outperformed the Nifty
    • Yellow – Nifty stocks that have outperformed the broader market
    • Red – Non Nifty stocks that have significantly underperformed the Nifty
  • We can see that the size of the green area is significantly less than the combined Yellow and Red areas. This shows how much the Nifty has become disconnected with the broader market in the past 12 months alone.
  • Consequent to my study above, I can safely conclude that in the past 12 months investors would find greater underperformance of their stock and Mutual Fund portfolios when compared to the Nifty as a benchmark

What to Do?
Steep market corrections instill a sense of fear no doubt, but also create an opportunity for investing more at lower levels. The right thing to do in such difficult times is to stick to the process – which in simple words means continue to invest as per your own risk profile. While doing this do keep in mind that the Nifty is no longer an indicator of the broader market. In any case the chart above shows that nearly 60% of the Nifty stocks gave negative returns in the past one year. Talk to your investment adviser so that he/she can choose fundamentally good stocks for your portfolio, whether from the Nifty or from outside the Nifty. If you can invest more at this time, you should. If not, just sit tight.

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