Honey! Bears have grabbed the stock market

What’s wrong with our stock market? Nothing, it’s just that we are in a long bear market with a difference that no one seems to have noticed it just yet.

Let’s look at the picture: the Indian stock markets, if you look at the benchmark Sensex and Nifty indices, don’t tell the real story. The BSE30 index at 37,172 on February 8 is just 1,817 points or 4.88% from the all-time high, while the National Stock Exchange’s Nifty is just 719 points or 6.11% from the all-time high. Sensex and Nifty posted all-time high of 38,989 and 11,760, respectively, last August.

When you scratch the surface the real story emerges, which is that many stocks have been in a bear phase for many months now. Technically, a stock market is considered to be in a bear phase when the stock prices decline 20% or more from recent highs amid widespread pessimism and negative investor sentiment.

In Indian markets case, the situation is worse. Many stocks have wiped off 50% and many even 70-80%, bleeding investors’ wealth and staying power.

And like in all the bear markets, this phase exposes leveraged and mismanaged companies. As billionaire Warren Buffett famously said: “It’s only when the tide goes out that you learn who has been swimming naked.” Surely, the bear phase has exposed many an Indian companies in the past, and this time it is no different. If in the past, the Harshad Mehta scam exposed many Indian companies; this time it is the IL&FS, Dewan Housing Finance Corp, Zee and, most-recently, Anil Ambani’s R-ADAG companies such as Reliance Capital, R-Com, R-Infra and R-Power, that have been caught with their pants down.

In a way, precisely for this reason, bear markets are welcome. As Shankar Sharma, well known investor tweeted last week: “I really don’t know why regulators around here hate bear markets. Bear markets expose scams. Bull markets keep them hidden. Harshad, Satyam and, now, a massive list of scams/ defaults… all out, thanks to bear markets. Bear markets should be seen as ethical hacking.”

Ethical hacking or not, a common investor is now wondering whether there will be a turnaround in their fortunes in the coming months. But before we got to the current situation, there was a massive bull phase from December 2013, in expectations of a massive win by Narendra Modi in the 2014 general elections, to February 2015 in the first nine months of the Bharatiya Janata Party-led National Democratic Alliance rule.

Consider this: the Sensex shot up 43.12% during the 14-month period from 20,514 to 29,361 points.

From that high in February 2015, the market started showing its fragile foundations when the Sensex fell 21% to 23,002 in February 2016. From that low point began the next biggest rally for the Sensex. It gave a 56.35% return in the rally which saw the bellwether index touching a new high of 36,443.98 before closing at 35,965.02 in January 2018. The bull run saw the index giving a massive return of 56.35% in a 23-month phase.

From that point though the Sensex seems to show a steady picture, it is a story of the meltdown of a large number of stocks. A report in the Economic Times put the loss of investor wealth in the last one year at a whopping Rs 23 lakh crore.

The report said ten large cap stocks — Reliance Industries, TCS, HUL, Infosys, HDFC Bank, Bajaj Finance, Nestle, Axis Bank, Asian Paints and Wipro — contributed Rs 6.52 lakh crore since February 1 last year. Clearly the gains by the ten biggies covered up the massive destruction in investor wealth in the last one year or so.

So where are we headed now? There is a consensus among market experts and observers that we are in the latter stages of the bear phase, and there is a good chance that by the end of the forthcoming Parliament elections, the markets would bottom out.

While it’s difficult to predict the bottom, it may be wiser for the investors to start putting money in markets via Systematic Investment Plan (SIP) route, and next 24 months may be a time to reap the benefits. Yes, bear markets are bad, but it removes all the bad players/companies from the market, giving way for a new beginning. Will this be the start of the new beginning?

Experts reckon that a bottom can be judged by the extreme pessimism shown by investors. We are seeing signs of extreme pessimism in the market. It seems as if everyone is fearful that a hung Parliament may further weaken the stock prices. The benchmark stock indices may show signs of cracking if the Lok Sabha elections indeed throw up a hung Parliament, but then good stocks – companies with high corporate governance standards, that are in a consistent growth trajectory (like TCS or HDFC Bank), will produce health results, whoever comes to power at the Centre.

So, yes, this is a bear market, acknowledge it: however, bear markets do not last forever. Markets have always rewarded the courageous and this may be the time to be courageous and start investing.