FY2018 was an ok year for Indian markets. The statement seems strange given what has been happening since late January. In spite of the correction over the last two months, we still ended the year up 10%+ on both the NIFTY and the NSE 500. Not quite the blockbuster returns we saw in Jan 2018 when both indices were at 20%+ returns for the financial year and certain individual stocks were giving double-digit returns in a matter of days.
Things were so good that a random selection of stocks would have done fairly well over the last year [Read this before deciding your 2018 strategy]. But everything about financial history suggested such valuations were unsustainable back when I wrote my calendar year-end post [Brace for negative returns in 2018] where a simple regression on three widely available metrics suggested a flat to negative 30% return for CY2018. A global study by German Asset Management firm Star Capital highlighted India as one of the most overvalued stock markets in the world alongside the US and Switzerland [Five charts that should worry Indian investors].
Sure enough, the majority of stocks have lost more than a quarter of their value since January 2018.
Projections and predictions are all fine and for the most part useless, but for the first time in a long time, they caused me to scrutinize my portfolio and those I advise to ask myself the tough question; “Whether and how much to sell?“. While up and down appear to be binary results of investing, what matters is the extent of swing in either direction. Getting the direction right most of the time is useless if it causes you to miss big up or down moves.
Since markets go up 6 out of every 10 years, the base case for equities has to be positive followed by consideration for current valuations. This probabilistic framework helps arrive at the hypothesis that markets are likely to go down in 2018, and the chances of a sharp fall (> 30%) are 3.5x more than in any given year, but still far from a certainty.
Hence the decision to sell stocks that had run up to unrealistic expectations of future earnings growth, to exit low-quality stocks that were prime candidates for sharp corrections, hold the rest and to diversify internationally. [Why I’m not selling everything…yet]
Valuations still frothy
Even with the correction since January, we’re still in heady valuation territory. In a “perfect” world, valuations would correct to just where they are reasonable and then stabilise but then who would make money from stocks? As a fundamental investor, as much as I hate to say it, “momentum is a thing”, which means the downward trend is likely to continue for a while. Especially given the number of global and domestic macro (central bank rate hikes, banking sector skeletons) and political triggers (state and national elections) in the next few months.
Some days you feel invincible and slam on another plate on to the bar, and some days you’re breathing hard just stepping up to it. The physical gains get made by working out even on the days you feel least like it. In investing terms, the first 10 months of FY2018 were like the first scenario, since then it’s been the second. Money is made in the markets by engaging even when you feel least like it. And that doesn’t necessarily mean only buying or selling.
Here’s to a productive FY2019.