What to Buy in This Crash for Long Term?

#1
Dear Alchemist,

I understand that this great crash may not be over soon. I also understand that senior members offer insights or viewpoints and not stock ideas.

However, if I assume Corona virus disappears in next one year, which stocks are fundamentally good and reasonably valued after today's fall that I can buy (with initial 3-4 lakhs) and may be add thereafter (15-20k per month) for next 3 years ?

Amar
 
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Alchemist

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#2
My personal belief is that the virus issue will become insignificant by April end.

However, I expect the bear market to last much longer.

US has had a bull market for 11 years.

A bear market that follows such a long bull market won't be over in 4-6 weeks. It will stretch much longer.

Once the virus numbers start declining, we will see a strong bull wave which may take the Nifty to as high as 10000 or maybe even 10500.

That is the maximum that I see the Nifty going in next 2-3 years.

On the downside 6300-6400 is a very strong support for the Nifty.

Indian economy already had serious problems before the virus struck.

I feel the next 2-3 years are going to be horrific period for the Indian financial sector with NPAs rising significantly.

I also expect government debt to rise significantly in trying to stimulate the economy and stabilize the financial sector.

For returns, I think consumption stocks are still the best bets provided one doesn't pay too much.

To reduce risk in the portfolio, one can look at stocks will steady businesses where revenues are more or less secure like Power Grid, hydro-power companies, gas distribution companies etc.
 
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Alchemist

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#3
Both from the perspective of time and value, it seems there is still a significant part of correction left for the market.

This is a 20 year chart for the Nifty 50.

Nifty has seen 2 major bear markets before 2020.

In 2000-2002 bear market, Nifty lost 53% of its value.

In 2008 bear market, Nifty lost 65% of its value.

In 2020 bear market (which is just 2 months old), Nifty has lost only 35% of its value till now.

I feel the bear market still has a long way to go and gradual buying over the next 2-3 years will yield much better results than lump sum investing.

Indian economy performed much better than the western economies in the great recession but this time I think India is in a worse position; mainly because

1. India's economy was already slowing before the virus arrived.
2. Governments in India (central and states) are already fiscally strained.
3. India's financial sector has been a big mess for some time. India's debt resolution processes are slow and ineffective. What should get done in 1-2 months takes years in India. IL&FS, DHFL. RHFL, Air India are some of the examples...

With economic activity coming to a standstill all over the world, NPAs of banks and NBFCs will explode. Even secured loans will create major problems as supply of assets will outweigh the demand.

A few more NBFCs and maybe even some banks will vanish (forced to merge with other banks).

 

Alchemist

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#5
Crude savings on import bill won't have a net positive effect??
The savings would have been a great boost in a normal circumstances.

In 2019, India's import bill for petroleum products was around $125 billion and petroluem product exports were around $35 billion. Net import was around $80 billion.

I am just using my own estimates as I don't have the exact figures.

If value of net import value halves, India will save around $40 billion.

This is close to CII's estimate of $45 billion.

A $1 decline in the price of crude oil reduces the country's import bill by $1.5 billion. "In 2020, international crude oil prices are expected to average $35 per barrel from $65 per barrel in 2019, a fall of about $30 per barrel. India is expected to save about $45 billion on oil imports for full year 2020-21," the industry chamber said in a report.
https://energy.economictimes.indiat...-on-oil-imports-next-fiscal-says-cii/74759111

$45 billion is around Rs 340000 crore.

That's just 1.6% of the GDP which is over $2800 billion dollars.

The point to note is that from this 340000 crore, only around Rs 200000 crore will go to the central government and rest to the state governments (depending on how tax rates are altered in next 1 year and also assuming that pump rates are not changed much).

Even before the full effects of the virus percolate through the economy, government finances are in a mess.

With just 10-15 days of March being in a lock down, direct tax collection has fallen short by Rs 142000 crore.

Direct tax collections declined to Rs 10.27 lakh crore in the year ended March 31, falling 12.2% short of target, people familiar with the matter said. The collections missed the revised estimate of Rs 11.7 lakh crore in the Union Budget presented in February by Rs 1.42 lakh crore.
https://economictimes.indiatimes.co...-a-shortfall-of-12-2/articleshow/74960123.cms

The government has already announced a 170000 crore package for the poor and weaker sections. This is just a 3 month package.

People are expecting much more from the government especially for industries likes airlines, hotels, entertainment, NBFCs, construction etc and also for those who lose jobs or see income decline.

God knows where the money is going to come for.
 
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Alchemist

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#6
US (GDP $22000 billion) has already announced a fiscal stimulus of $2000 billion and may increase the size - 9% of GDP.

https://www.washingtonpost.com/us-policy/2020/04/06/trump-democrats-coronavirus-stimulus-trillion/

Japan (GDP $5200 billion) has announced a fiscal stimulus of $989 billion - 19% of GDP.

https://www.bloomberg.com/news/arti...kage-to-come-in-two-phases-documents-k8nuj552

Tiny Singapore (GDP $362 billion) has announced a 3 fiscal packages totaling $42 billion - 12% of GDP.

India's $23 billion stimulus is not even 1% of its $2900 billion GDP.

India will need much more money to stabilize the economy.

Increasing taxes or selling assets is not going to bring any significant money.

Only option that I see now is using a part of India's forex reserves ($475 billion or so).

Even though that may seem like a good option, it is actually a risky option.

India's net investment position is negative. It means our external liabilities are more than our external assets. If we use up a large amount of forex reserves, we can face issues when our creditors start asking for their money (dollars) back.

In my opinion, in absence of any other ways to raise money, government may decide to use 50-100 billion dollars worth of India's forex reserves to stimulate the economy.

https://en.wikipedia.org/wiki/Net_international_investment_position

 

Alchemist

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#7
Another option that the government has is deficit monetization.

India is already monetizing its deficits indirectly with OMOs.

“Monetisation of the deficit is inevitable. Such a large increase in expenditure cannot be managed without monetisation of government debt," said former RBI governor C. Rangarajan in an interview with BloombergQuint. Under the Fiscal Responsibility and Budget Management Act, RBI had stopped the practice of direct monetization in 1997. The rationale was that central governments could fall prey to “print and spend" without any scruples with a central bank monetizing the borrowings. This would flare up inflation in a supply-constrained economy like India

A. Prasanna, head (research) at ICICI Securities Primary Dealership Ltd, said it would be the last option. “Fiscal deficit is getting monetised indirectly through OMOs.
https://www.livemint.com/market/mar...-wallet-to-the-government-11586113907309.html

Two interesting reads:

https://www.cnbctv18.com/views/mone...lates-banking-liquidity-explained-5332721.htm

https://economics.rabobank.com/publications/2019/april/is-india-slipping-back-into-bad-habits/
 

Alchemist

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#8
If the India lockdown continues till mid-May along with moderate relaxation after the end of 21-day lockdown on April 14, it could put 32 million livelihoods at risk and swell non-performing loans (NPLs) by seven percentage points, resulting in the economy contracting sharply by around 20% in the first quarter of fiscal year 2021, with –2 to –3% growth for fiscal year 2021, a new report warned on Friday.

According to the report by leading management consulting firm McKinsey and Company, the cost of stabilising and protecting households, companies and lenders could exceed Rs 10 lakh crore, or more than 5 per cent of GDP in such a scenario.
https://www.moneylife.in/article/32...entage-if-lockdown-on-till-mid-may/59998.html

I think it's extremely risky to buy any finance company stock at the moment.

Banks and NBFCs are leveraged 8-12 times and if the virus is not controlled soon, some of these companies will face extinction in coming months.

India in a bad fiscal position too. Indian government has to pay a high rate of interest to borrow money whereas major economies in the west are borrowing money at near zero rates (some at negative rates).

If India's sovereign debt is increased by a large amount, India may end up with a junk rating and this will make things worse.

“The yield on USA’s 10-year paper is 0.77 per cent. In India, it is above six per cent. India is at a BBB (lowest investment grade). If we get graded down, we will become a junk bond and this will crash the economy. This is also why it will be difficult to print money,” Parekh said.
https://www.business-standard.com/a...e-liquidity-deepak-parekh-120041101332_1.html
 
#9
Lockdown has been extended in India till May 3,2020.

First supply was hit,then demand was hit,now we are in limbo.
Our Government is not in a position to give any significant fiscal stimulus.

From a financial markets perspective,sectors that are in favor now are:

1. Pharma
2. Chemicals
3. FMCG (Companies that are primarily into grocery items/food).
4. Telecom
5. Internet based companies.

Even the companies in the above sectors will get affected so no need to chase anything,also avoid companies that lack balance sheet strength to tide over this tough stretch.

Sectors that are facing a lot of problems now are:

1. Travel and tourism (this will take the longest to revive).
2. Real estate. (Sky high prices,poor customer experience and weak economy)
3. Banks/NBFC's. (Job losses,poor demand and high credit costs.)
4. Gems & Jewellery(majority revenue is from exports which will be severely hit)
5. Infrastructure(too dependent on Government spending)

The longer this lockdown continues the deeper the stress will percolate,liquidity issues can become solvency issues very quickly since many small businesses live month to month,they may at most survive 3-6 months.
 
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Alchemist

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#10
The longer this lockdown continues the deeper the stress will percolate,liquidity issues can become solvency issues very quickly since many small businesses live month to month,they may at most survive 3-6 months.
True.

Arranging liquidity has always been a challenge for MSMEs in India. With mounting losses, many of these businesses are now just weeks away for collapse.

The coming recession will be a graveyard for small businesses.

As if the demand destruction wasn't enough, the government has now issued a farmaan that all businesses have to continue paying salaries/wages.

Many small businesses operate with single digit net profit margins.. Mandatory salary payments will push smaller businesses into deep losses.

Many governments in the west are partially paying salaries to workers in private businesses. This may not be possible in India, but the government could have limited its diktat to 30%-40% of the salary. That way many small businesses would have had a much better chance of survival and the burden of the recession would have been shared between the employers and employees.
 
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#11
Arranging liquidity has always been a challenge for MSMEs in India. With mounting losses, many of these businesses are now just weeks away for collapse.
India has about 6.4 to 6.9 Crore MSMEs.

According to various reports at least a quarter of them are under threat of closing down.

https://economictimes.indiatimes.co...wn-persists/articleshow/74880940.cms?from=mdr

Forget MSMEs, the state of finances is such that many State Governments have already cut salaries by 25-75% under the garb of austerity, even the central Govt. has had to suspend MPLADS and is probably going to defer most of the other expenditure.

Screenshot_2020-04-14 Microsoft Word - 2020FIN_MS27 - Austerity measures2020FIN_MS27 PDF pdf.png


State Governments are borrowing at 9% when the 10 year is at 6.5%.

No Bank or NBFC will lend to MSMEs in this scenario when they themselves are facing issues both on the liability side as well as the asset side,even if the lend it will be at ridiculous rates.

The US is able to get away because they are the reserve currency.
They are giving $1,200 stimulus cheques to individuals apart from $350bn in loans for small businesses that may be forgiven if firms use them to keep workers on payroll,in addition they are giving $500bn in aid for hard-hit industries.
The FED is doing it's own thing printing trillions.

Even Italy which is a country that has a debt to GDP of 132%(before the crisis) is giving €600 a month to those who are unemployed from April 1.

In comparison,we don't even have proper unemployment data(estimates are that our unemployment is around 23-25%).
Our Govt. is crediting Rs500,some states are giving up to 1500 along with rations for food which is probably enough for their subsistence for now,but what about the businesses that are suffering?

The middle class is also hit very hard,even the moratorium that was announced by RBI is either not being offered by some banks/nbfcs and the 'lucky' few who are availing of it will have to pay the interest which will continue to accrue during this period,which will be extremely bad for people high interest rate loans like credit cards.

A loss of job is a loss of dignity for many individuals and I fear more people may die from economic devastation than Corona if they keep the economy in stasis.
 
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#12
The situation appears grim.

I suggest that with a 3-5 year horizon, invest in US stocks vs Indian.

There are 2 advantages: US companies are likely to fare better given the stimulus ... and even otherwise, the Rupee is likely to fall. Even if US stock process stay static, we will get gains in Rupee terms
 
#13
The situation appears grim.

I suggest that with a 3-5 year horizon, invest in US stocks vs Indian.

There are 2 advantages: US companies are likely to fare better given the stimulus ... and even otherwise, the Rupee is likely to fall. Even if US stock process stay static, we will get gains in Rupee terms
Stimulus or not,it makes a lot of sense to diversify out of India to the extent of at least 25-35% of the portfolio,most of the market leading high growth exciting tech companies are listed there.

If you are looking at a mutual fund that follows this,take a look the Parag Parikh Long Term Equity Fund.

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#14
Stimulus or not,it makes a lot of sense to diversify out of India to the extent of at least 25-35% of the portfolio,most of the market leading high growth exciting tech companies are listed there.

If you are looking at a mutual fund that follows this,take a look the Parag Parikh Long Term Equity Fund.

View attachment 30
I started a SIP in this last month.
 
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Alchemist

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#16
Nifty has broken past the 38.2% retracement level of 9390.

Next Fibonacci levels to watchout for are 9971 and 10551.

I expect the market to slowly keep moving up as the economy re-opens.

The real extent of damage done to the economy will be known only after 3-4 months.

 

Alchemist

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#17
There is significant selling pressure above 9400 and even today market has come down after breaking out initially.

Nifty isn't even able to stay above the 38.2% retracement level and that is a worrying sign.

Government is likely to open up most parts of the economy from next week - not because the virus is under control but because there is no other alternative. An extension of the lockdown will totally destroy the economy.

In my opinion, the market still has more downside and possibly March low will break too.

Please note: shorting in such a market is risky. Any positive news can trigger a massive short covering rally.

Possible positive triggers for the market are announcement of any deficit monetization plan, announcement of "bad bank" plan or any confirmed discovery of a cure/vaccine for Covid-19.

 
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