The 5 lessons I learnt from the markets in 2018

2018 started in a buoyant mood, but is ending on a somber note. Some of the factors like trade war and slowdown in the global economy are new worries that the market is struggling to grapple with.

For the Indian market, a lot happened in 2018. It was an eventful year – the Sensex touched all-time high at a kissing distance of the 40,000 landmark (highest value was 38,989). The political fights, NCLT cases, meltdown in mid-caps and small caps, IL&FS crisis, strong SIP flows and heavy selling by the FPIs in the emerging markets, including India, were major highlights. Also, surges in crude prices and the consequent falls in rupee against the dollar are the other highlights of 2018.

As I write this piece, Sensex is up by five per cent in 2018, but sentiment-wise, we are much lower than what we were at the beginning of the year. Only a few stocks are helping the Sensex to remain in the green zone. Out of the BSE 500, as many as 373 stocks are quoting below their levels at the beginning of the year. The market cap of India Inc., which was at Rs 151.73 lac crore at the beginning of the year, is now at Rs 143.30 lac crore. But this number does not reflect the erosion in the quantum of wealth of the retail investors.

After outperforming many years in a row, the mid-cap and small-cap stocks have cracked. Just look at the aggregate market cap of “B” group, which consists of mid-caps and small-caps. It was Rs 24.27 lac crore at the beginning of the year, but presently it is down by almost 50 per cent to Rs 12.21 lac crore! What made matters worse was that some of the favourites of investors such as P C Jewellers (down by 82 per cent), Manpasand Beverages (80 per cent), Vakrangee (91 per cent), DHFL (59 per cent), Jet Airways (70 per cent), Shankara Build (70 per cent) Infibeam (66 per cent), Rain Industries (64 per cent) to name a few, have cracked substantially in 2018. The prices of these companies corrected so sharply that investors could not book profits.

Rocky year, but not as bad as 2008

2018 started on a very strong note with January showing gains of 2000 points. But then came the budget, wherein the government announced reintroduction of long-term capital gains on equity. Since then, the sentiments have turned negative. The SEBI guidelines on realignment of mutual fund schemes also played its part as the AMCs were forced to reshuffle their portfolios. April and July were the best months of 2018 when the Sensex reported gains of more than 2,000 points each. But these gains were either preceded by a fall like in the month of February and March, or got wiped out in subsequent months like in September and October. September was the worst month of 2018, with the Sensex losing 2418 points.

Combined with October, the Sensex lost 4200 points in just two months—creating a fear-like situation similar to the 2008 sub-prime crisis. Investors’ portfolios are yet to recover from the cracks of September and October. 2018 was not an easy year for the mutual fund industry either as the schemes too struggled to report positive gains in NAVs. As per the data available on Morningstar website, barring the three categories (Index, FMCG and IT), almost all categories’ average returns are in the negative. Retail investors this time have shown great maturity by investing in mutual funds through the SIP route. Normally, they panic when the market falls. Hope they continue to have faith in equity in 2019 too.

So, what are the learnings?

  1. The first big learning is that never chase stocks that are high in demand. If you do that, the probability is very high that you will end up buying companies at the top of the cycles. Some of the above mentioned companies which cracked significantly fit the bill.
  2. The second learning is, never try to catch falling knives. Fallen angels take a very long time to regain investors’ confidence, and many times, they never do—like Suzlon. We have seen how companies that have fallen as much as 70 per cent are not able to find buyers even at the lower levels. Is it not strange that what was looking attractive at higher valuations are not attractive at lower levels? Their slide continues.
  3. Another learning is that every industry has its cycle. One should not assume that the upward cycle will continue forever. NBFC is a case in point. NBFC industry had a good run in the last few years and many NBFCs created good wealth for the investors. But after the IL&FS crisis in 2018, that cycle got broken. Some of the NBFCs like Aditya Birla Capital is down by 48 per cent. So is the case with Edelweiss, which is down by 38 per cent, DHFL is down by 59 per cent and Ujjivan by 30 per cent. Going by the past trend, when a sector loses its fancy, it takes longer time to regain investors’ confidence. We have seen that with infra—the darling of investors in 2007, or pharma, which was investors’ darling till a couple of years back, but it is struggling now. In 2018, the pharma index is down by 10 per cent, despite many experts believing that 2018 would be a comeback year for pharma. I don’t expect NBFC to regain fancy in a hurry. Hence, don’t go overboard on the sector. Also, keep a close watch on your sectoral allocations. I would suggest a stock-specific approach within the sector.
  4. Yet another learning is that the stock market does not like any political party. Despite BJP losing the assembly elections in three key states, the immediate market reaction was upward, as against the general belief that it would go down. The election results do impact the market, but not for more than a day. This learning is important as India will have general elections in the next few months. Don’t take a trade based on which party will come to the power, but take position based on fundamentals of the company. This is the best recipe to make money. Election results are noise and smart investors should avoid noise. One weird coincidence is that whenever the year ends with the digit 8, it turns out to be a bad year for the investors. 2008 was bad for the equity market. I am not sure about how world indices behaved in 1998, but it was a bad year for the Indian equity market. Sensex was down by as much as 16.50 per cent that year. If the same trend continues, 2028 would be a tough year for the equity investors.
  5. Lastly, a big learning is that the market loves rotation of sectors. IT was not the favourite of market in 2017 even though the overall market was bullish. But in 2018, the IT sector was a rocking star (BSE IT is up by 24 per cent and TCS is up by 42 per cent) in a subdued market. If you wish to make money in 2019, identify the sector that is down today, but has potential to be outperformer in 2019. That’s the key to make money in the stock market.

Bye Bye 2018. Welcome 2019.

 

Sunil Damania

Market Expert

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The views and opinions expressed in this article are those of the author and do not necessarily reflect the official VIEW or position of Credent Asset Management Services Pvt Ltd.

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