Why are the stock markets crashing and what should you do ?

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The market rout that started with the dawn of the new year continued yesterday with the Nifty closing at a 19 month low of 7437.80 down by 99 points(1.31%). BSE Sensex fell 317.93 points(1.28 %) to 24455.04.

Ostensibly the fall was caused by the fall in oil prices which dipped below the $30 barrel mark. The WTI was trading at $29.42 and the Brent at $28.94 at the time of writing this article. The Dow recovered to close down by 390 points after falling 530 points. The fresh fall in crude was linked to the impact of Iran’s entry into the global oil market which is already reeling under massive supply glut.

But there is deeper malaise which is a derivative of the poor state of the global economy as a whole. A week into the new year a host of influential experts and investors warned of a gloomy 2016

George Soros said “China has a major adjustment problem,” Soros said. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”

JP Morgan experts said this in a note “Our models suggest that US recession risks over a two- to three-year horizon have increased materially as a result of weak supply-side performance. US expansions don’t die of old age, but an environment of tight labor markets amid weak productivity gains and limited global pricing power signals that the expansion is becoming more vulnerable.”

George Osborne who warned of a “Dangerous Cocktail” of risks. Here are some of the major ingredients of the cocktail that threatens to unleash a perfect storm in the global economy.

The much vaunted BRICS grouping is in battling multiple crises at the same time. Russia is battling multiple problems of falling crude prices, internal turmoil, western sanctions and its involvement in the Mid-East. The country is also facing a massive budget deficit since it requires oil to be at $82 dollars to balance its budget. it derives over 50% of its revenues from oil. The Russian economy is a very bad state contracting 4.1% year-on-year.

Wikipedia

Brazil is battling a spiraling corruption scandal that is hanging a threat of impeachment over Dilma Rousseff. The commodities rout has battered the South American giant since it was a large exporter of commodities to China, its largest trading partner. Spiraling inflation which is currently at 10%. is another sign of the looming crisis in Brazil. Brazil’s GDP shrank 1.7% in the third quarter of 2015, “worse than market expectations,” and has had negative growth for over a year

China needs no explanation what with a constant deluge about the state if it’s economy and the impact of its transition for a spending economy to a consumption economy battering our senses. The origins of the new years continued crash also can be attributed to mounting worries over the state of the Chinese economy and fall in Chinese equities under a new circuit breaker system that has been since removed.

Japan is battling a decades long deflation spell and is continuing its much maligned quantitative easing program worth $680 billion a year. The core consumer-price index, which excludes fresh food, was up 0.1% from a year earlier in November way below the BOJ’s target of 2%. Japan is also grappling with an aging population that also is stubbornly refusing to spend forcing it ramp up its stimulus program. Japan’s QE program is so large that it now owns $54 billion in exchange-traded funds (ETFs) or roughly about half of the ETF market.

This level of central bank intervention is unprecedented and shows how deep the rot has spread not only in Japan’s economy but also the global economy.

South Africa also is a victim of the commodities crash and a slowdown in China. It is also facing the threat of a rapidly depreciating South African Rand which has fallen by over 44 per cent against the US dollar, 48 per cent against the Yen, and 31 per cent against the euro. It is also reeling under the impact of a severe drought.

The Eurozone continues to battle deflationary pressures with the CPI inflation at 0.2% way below its target of 2%. The EU also officially embraced NIRP(Negative interest rates policy) where the banks have to pay the central bank to park money. It also facing a worsening refugee crisis and a radical political transformation that is seeing many right wing parties getting sizable political representations. A reluctant GDP that is refusing rise is adding to the monetary unions woes.

The state of the US economy also leaves a lot to be desired. The December rate hike was supposed to be a signal that that the economy is performing decently and on a road to recovery, but all the data points since the hike including the recent jobs data have been negative.

US retail sales slipped 0.1% in December wile the consensus was that that there would be no change. Retail sales excluding automobiles, gasoline, building materials and food services (which can be volatile), fell 0.3% last month, following a 0.5% rise in November.

Industrial production data was also negative with output falling for the third month in a row, by 0.4% in December, after a downwardly revised 0.9% decline in November. The fall in crude was a major contributor.

In a note titled “Is it safe?” published Thursday, the strategists at JP Morgan said that 2016 is likely to see “pockets of stress,” and that the US economic expansion is becoming “more vulnerable.”

Rising global debt

Global debt has grown by $57 trillion to reach $199 trillion in the seven years following the financial crisis – a 40.1% rise, according to a new report. All major economies are now recording higher levels of borrowing relative to gross domestic product (GDP) than they did in 2007.

Total debt as a share of GDP stood at 286% in the second quarter of 2014 compared with 269% in the fourth quarter of 2007. China’s total debt has nearly quadrupled over the same period, rising from $7 trillion in 2007 to $28 trillion by mid-2014 fueled by real estate and shadow banking.

Although hight debt to GDP levels don’t suggest imminent disaster, they are a dangerous sign especially during a deflationary environment.

The above factors will be the major hotspot’s to watch out for heading into 2106. We at Lazyrupee expect Brazil and Japan to be the next troublemakers with Eurozone’s troubles mounting slowly.

2016 may very well not see any crashes but it will be the year when the perfect storm will brew and be ready to lash out.  Read what Larry Elliot had to say

India is okay…ish!

A host of  analysts, both individual and institutional alike have been harping about the growth prospects of India and some have even termed as an island of growth. But it doesn’t take away the fact that Indian economy is linked to global economy and any turmoil will directly have bearing over it.

But India also has many positives going in favor of it, most importantly it has a stable political regime (for what it’s worth), falling commodity prices are net-net beneficial, a fiscal deficit under control and inflation under check. But continuing rout in commodities and crude will be harmful as it will lead to reduced capex and jobs. But the negatives what you and me should worry are about with

• The most prominent one being the high levels of NPA’s in the banking sector with a disproportionate amount of it being confined to the PSB’s. The RBI has set an ambitious goal of cleaning up the NPA’s mess by March 2017, but we still remain skeptical given the scale of the problem which we covered in this article. Corporate India is addicted to debt
• Discom debt crisis, although UDAY scheme is a positive.
• Over leveraged balance sheets of the private sector which has led to muted investment growth hampering the prospects of a cyclical recovery.
• With the government frontloading a significant amount of public spending and private investments yet to pick up, there have been calls for the government to relax the next years fiscal deficit target of 3.5%, but if it does relax it it will send a negative signal to the global investor community but will be a positive for the domestic economy and the investor community will be looking for cues in the budget as the whether the government will loosen its purse strings or tighten it.
• China has become the biggest trade partner with almost every country in the world, hence gyrations in China will continue to impact India as well.
• The flailing reforms drive is another problem with crucial pieces of legislations such as land bill, GST being victims of political polarization.
• Although there have never been three successive monsoon, the pattern of rainfall and the amount of ti will always be a a risk. El Nino is expected to peak and analysts are now predicting La Nina which brings heavy rainfall. But the chances of Climate Change disrupting the quantum of rainfall remain.
• With two successive failed monsoons, rural spending will remain depressed and firms will be looking for the elusive recovery in consumer discretionary in urban areas.
• Many analysts are predicting a bottoming of earnings and the tone and path of the markets will depend on how the earnings recovery pans out. So far the Q3 results have ranged for disappointing to muted.

So to put it simply the global economy is a mess and sadly India is also a part of it, and we will be affected whenever global volatility spikes.

So what should you do ?

Markets rise and fall, thats the reality but investors should understand the underlying economic dynamics and tune their investing and trading strategies.

The key to surviving any crash is to buy and hold quality

First rule is to never panic, that is if you are holding quality stocks. If not then may the countless god’s bless your portfolio.

As presented above there is sufficient evidence to prove that the global economy is in a bad shape, but that doesn’t mean that it is going to implode overnight. Central banks have some amount of ammo(No much but some) left in case a crisis but based on the data you should take a call whether to stay invested or get out and enter at crisis levels.

Extraordinary and unconventional monetary policies have disfigured the global economy but it remains to be seen the full impact of those policies namely QE, ZIRP and NIRP.

But the undeniable fact is in spite of crashes, corrections, recessions and terrorist attacks the Nifty and Sensex have risen over a period of time and will continue to, but the pace will differ based on the state of global economy and the pace of its recovery in the event of a financial crisis.

Remember your returns are proportional to the quality you hold

1. Average down: Markets will fall during economic turmoil but if you are long term investor average down with market falls and over a period of time you will have a better entry price.
2. Stay away: When bears are in full control there is very little you can do, so one option is to completely stay away, until the storm subsides no matter how long.
3. Don’t bet what you can lose: “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” Warren Buffet. Put in the money that you can afford to lose as cruel as it sounds.
4. Hedge your portfolio with derivatives: “Derivatives are financial weapons of mass destruction.” Warren Buffet. Use them only when you truly y=understand the complexities of using them, if not then you are better off.
5. Diversify: Allocate your investible corpus into multiple asset classes such as equities, mutual funds, bonds and precious commodities. Putting all your eggs into a single basket is the worst thing you do during a market crash.
6. Look at beaten down stocks: Value investors thrive during turmoil, so look at under-priced and beaten down stocks proportionate to their quality and invest in them. Market crashes provide valuable entry points.
7. Jumping a leaking ship: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.” You don’t want to sell solely out of fear, but you don’t want to hold stubbornly on to a losing investment, either. Timing is everything. There are winners and losers with every market crash, and it’s largely up to you which team you’re on. Choose wisely, and let those–like Buffet–who’ve been there and done that help you out.
8. One mistake people most often commit is buy high and sell low. They enter the markets when valuations are frothy and expect the markets to perpetually rise which can lead to a lot of heartache and lesser zeros.
9. Hold defensive stocks: These are non cyclical stocks that perform irregardless of the economic cycles such as FMCG stocks. One more idea is buy quality names with high dividend yields so that you make some money regardless of crashes.
10. Don’t follow the crowd: Panic during crises can be contagious and most often than not it can be very destructive to follow the crowd and the parade of demagogues on CNBC, ET etc. It wise to take step back and evaluate your portfolio and remain sanguine.

This tweet gives a pretty good idea

Take a calculated, unemotional and circumspect stock of the Indian as well as the global economy and chart your course of action. Leave your emotions at the door.

Buy Right And Sit Tight And Happy Investing.