After a decade, cash may become king again amid market volatility

As Indian equities enter the bear market zone, experts urge investors not to make lump sum investments as stocks haven't bottomed-out yet

With a single day loss of over 8 per cent on the BSE Sensex and over 20 per cent meltdown in equities since their January peak of 42,273, it’s official that Indian equities entered bear market on Thursday. The day’s market wipeout also takes away gains the Sensex earned over the past two years.

“Volatility will remain very high and in the near-term, investors may opt to increase their cash levels,” says Jinesh Gopani, head-equities, Axis Mutual Fund.

While domestic fund managers are expected to take a call on increasing cash allocation from the average 5-6 per cent in coming days, they don’t rule out the number touching 8–10 per cent in the near term.

Gopani feels the redemption pressure could also be elevated in coming weeks, if equities don’t display any signs of bottoming soon.

Calling the bottom is tough

Hit by a twin problem of supply-demand instability due to the outbreak of COVID-19, which has virtually halted global trade, and the consequent reaction of global fund managers pulling money out of risky assets, including emerging market equity investments, Indian equities have seen Rs 24,000 crore being pulled out so far in March alone.

Gopani feels this sort of foreign money sell-off could continue for a while. “Money coming into India was through exchange-traded funds, which by nature are lazy money. These investors are pure executors and when they have to pull out of a market, they don’t look for technicals or fundamentals. They just exit,” he explains.

Global macros, including trade being weak for almost a month, also don’t give these foreign investors a reason to relook at their redemption stance. “With the pandemic spreading to the US and the UK, trade momentum will take a backseat,” said another fund manager.

 

This could further weaken India Inc’s earnings. If markets are to be priced to earnings, at least two quarters of earnings may be under pressure. Worse, the impact on earnings isn’t clear yet. So, calling the bottom will be tough.

Switzerland-based UBS sharply downgraded India’s growth prospects recently, even as it acknowledged that the country is somewhat distanced from the global supply chain. “In our base case, we expect India’s real gross domestic product growth to slip further to 4-4.5 per cent year-on-year (YoY) in the March and June 2020 quarters, from the 4.7 per cent YoY growth in the December 2019 quarter,” says Tanvee Gupta Jain, economist, UBS.

What does massive foreign money sell-off and lowering of growth prospects mean for Indian investors? They may opt to wait on the sidelines and conserve cash.

“We saw this situation in 2008-09’s global financial crisis, and history is repeating once again, though at an unprecedented magnitude,” says the research head of a foreign brokerage. “We are sounding off our foreign clients to not be lured by cheap valuations in India, as we feel the downside risks haven’t faded,” he cautions.

Domestic fund managers are also warning their clients to brace for more volatility. “We are advising investors against making lump sum investment, even if they feel the market has corrected a lot,” says Gopani.

A research head, whose firm specialises in managing portfolios of high net-worth individuals (HNIs), says very few clients showed interest in bottom-fishing on Thursday’s trade. “HNIs want to conserve cash. That may be true for retail investors too,” he adds.

The underlying message is that appetite for risk isn’t sanguine and cash will be king in days to come.