Correction or Bear Market?

WHEN THE TIDE TURNS India is the collateral damage and not the eye of the storm. Once the storm passes and the dust settles, India should

emerge a stronger economy

Contd..There are many definitions of he terms `correction' and `bear markets'. It is important to disinguish between the two to bet er strategise.If one were to chart the Sensex history since 1979, we would note 16 instances of 10-30% declines hat lasted over a 3-9 month time rame. There are, however, only six instances where we witnessed a decline of more than 30% which asted for more than 9 months. As on date of writing this article, Sensex has already corrected close to 20% from its peak of 30,025 o a low of 24,834 and we are into he seventh month of correction.It would be fantastic to be able to ake a cash call every time the market was about to see a 20% drop and redeploy it at precisely he appropriate moment. Besides, even though you might have a bearish view of the market, sell decisions are based on company fundamentals. Lots of stocks can ride out a correction without significant damage to he price, but not many can survive a bear market. The real bear markets are fewer and it is much more productive to call those.

Contd..Every prolonged market trend has its genesis in some fundamen al characteristics. Once the driver of the trends plays out or if the valuations reach an extreme that is a ime that one should be worried about serious wealth destruction.2011 2015:Usually bull markets are driven by falling interest rates and pickup in economic growth. But this bull market has not been driven by either. In my opinion, it's a trend driven by ROE. It has been a phase dom nated by survivors and market eaders. Businesses with a differentiated product or companies expanding into newer markets have done well. Drivers of ROE have been cost-cutting, expand ng market share, falling input costs, judicious use of capital.The overall pie has been shrinking but the stronger players are wresting away market share. Going has been tough and only the tough got going.The usual `rising tide lifts all boats' has been missing as it is still a receding tide. Businesses and promoters that have been swimming naked are in full view of the market. If this is the beginning of a prolonged downtrend, what could possibly be the drivers of this trend? Some of the popular narratives are Chinese slowdown, Global deflation scare, US rate hike, and Central bankers running out of ammunition.

Contd..Given that India competes with China for raw materials as well as fund flows, the slowdown is a net positive for India. There are however a few pockets that will be hurt such as the raw material exporters that see China as a trade partner.Falling raw material prices have led to disinflation globally which has sparked off a deflation scare. This we believe will compel central banks to continue to pursue their dovish strategies to revive their respective economies. All of this liquidity will find India as a stand out destination once the dust settles.Chances of a 25bps rate hike by the US Fed have reduced due to poor jobs data and jittery global markets. Even if there is a hike, what really matters is the subsequent policy stance adopted by the Fed, which we believe will continue to be dovish and calibrated.

Contd..Central bankers from US, Europe, Japan and China have been following loose monetary policies to lift economic growth. Fear is that if global growth does take a nose dive again then central bankers have no tool left to revive the economy. India has been preserving its firepower. India has erred on the side of caution with expanding its balance sheet. India's government finances are on the mend. In this respect too, India stands out from the world.It would be foolhardy to believe that we would not witness any collateral damage in the Indian markets due to global turmoil in this globally hyper-connected world. Most of the drivers of today's downfall in markets are netpositive for Indian economy.It is important to remember that India is the collateral damage and not the eye of the storm.Once the storm passes and the dust settles, India should emerge a stronger economy. A strong and decisive government along with a prudent central bank that ensures a strong balance sheet for the country will make us ready for growth once these headwinds in the global markets pass. In the meantime, extreme valuations in quality and growth are cooling off, offering better entry points.

Contd..IS THIS A SERIOUS MARKET TOP LIKE 2000 OR 2007? Rapid growth in fund raising, extravagant capital allocation decisions, extreme retail participation are some of the anecdotal signs that one should watch out for during a market top formation. Excess leverage, unsustainable valuations and euphoria are other sentimental and technical indicators of serious wealth destruction ahead.These signs have been conspicuous by their absence which leads us to believe that this is not a time to be worried about major wealth destruction.WHY A PULLBACK IS PAR FOR THE COURSE?Overestimation of domestic recovery, complacency in highly valued stocks, deteriorating global environment, global competitive currency devaluation, six year uptrend in developed markets with no significant correction are reason enough for world and Indian markets to take a step back.

Contd..WHY INDIA'S BULL MARKET WILL CONTINUE?With valuations no longer being super demanding, we believe that India has the structural elements in place for the equity markets to continue to remain bullish.RECOVERY DELAYED, NOT DENIED.Benefits of crude windfall, frontloaded capex especially in road, rail and defence, improved government finances will provide the necessary tailwind to the economy. Falling interest rates will act as a fuel to long pent-up demand. Stable twin deficits, inflation under control, structural factors like demographics, capitalistic society, bulging middleclass ensure long-term flows into Indian equities. Alternative asset classes having peaked out, will also drive domestic flows towards financial savings and consequently into equities.To sum it up, markets are in correction mode. Correction can range from 20 to 30% and it can last for a period of 6 to 9 months. One should use this externally-induced volatility in markets to increase allocation to Indian equities. Since it is still not a rising tide, stock picking will remain the key.

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Parveen Kumar Chadha… THINK TANK

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