Market Perception: Falling Knife or Sweet Melon

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“Whether the melon falls on the knife or the knife falls on the melon, it’s the melon that suffers.” – Merle Shain

Similar is the predicament of shareholders/investors who bought stocks in the rising market and are still buying stocks in a falling market, it’s the investors who are suffering the most.

So, what could be the takeaway from the falling knife (rapid drop in the price or value of a security) or the sweet melon? Let’s understand each separately with their characteristics.

The falling knife

Falling knife in the stock market refers to the sudden decrease in prices or value of a security which can either rebound quickly or leads to bankruptcy in any stock or the company.

What is the present scenario with our Indian Equity Market? Does the shareholder who is like the proverbial melon get support from the policy makers or are they just cut apart in pieces? Will the shareholders face the same crisis as they did during the 2008 financial crisis? Is it just the impact of rumors or prediction of another 2008 like the financial crisis?

The Indian stock market has given amazing returns to investors in the month of August, where bulls tumbled bears to the ground at each round of the clock. But all good things come to an end, and so it was with the bulls when they faced a bumpy ride with the bears and lost control in the month of September. There were multiple global factors which led to the tumble of the bulls — US-China trade wars, depreciating rupee, rising crude prices and liquidity issues in NBFCs (Non-Banking Financial Companies) transactions. These factors not only impacted the investor sentiments adversely but also depleted their wealth by more than INR 10 lakh crore in a month.

The reasons behind such events were:

 

  • Rise in crude oil prices, due to the US sanctions on Iran and to the countries or companies who conducted transactions with Iran after the implementation of sanction. Thus, impacting emerging countries like India where crude oil consumption is more than 73% making it highly sensitive to oil price movements. India, is the net importer of around 3 million barrels per day of oil, resulting into the sensitivity of $11 billion: 40 basis points impact on GDP for every $10/barrel move in oil. (Source: MoneyControl)
      • In addition to this, the rise in dollar prices gave foreign investors an opportunity to take out money from the Indian market at better valuations which further resulted in a downward trend in the stock prices. And this consequently increased the bond yields (i.e. the rise in bond’s interest rates), impacting the delay in payment mechanism which gives bears full control to down ride the market.
      • As bond yields rise, banks and NBFCs, who borrows money in a chunk from the foreign lenders at market rates, face liquidity issues in paying off the interest on such debt. This creates a delay in payments or even creates defaults in high debt-ridden companies. Consequently, impacting high-quality NBFCs’ credibility, which further gives power to bears to tumble prices of blue-chips and other good-quality stocks in banking, micro-finance, and NBFC space.Crude oil doesn’t impact much until the RBI has sufficient reserves to pay the cost. But when the trade war started between US-China, it strengthened the US dollar to new peaks which resulted in the rise in oil prices. Thus, an increase in cost impacted not only the dollar reserves but also the crude reserves which led to an outcry in the economy for reduction of petrol/diesel prices and for immediate appropriate actions.
  • Besides global tensions and payment defaults, another issue which caused havoc in the market is the management of one of the renowned private banks by the banking regulator – RBI (Reserve Bank of India), who dissented the application of extending 3 years tenure into 6 months. And orders for the new successors on an immediate basis to the bank’s board affected investors’ sentiments in a very harsh manner i.e. leading up to 75% decline in prices of the share apiece.
  • Furthermore, to tackle all such issues, uniform measures taken by both the Indian government (rising import duty) and the RBI (selling dollars in open market) tried to heal the investor sentiments at some point but failed to do much because of delays in implementing such norms and measures. This gives the bear a sharp knife to kill or injure most of the quality listed companies major technical support zones or even bring down to their yearly lows. Investors who are investing directly/indirectly in the market started facing huge losses with the questions on the verge of economic decision making, corporate governance, company’s performance, and countries’ growth. Quality stocks where management instability and actions not only bleeds investors’ wealth to half in value but also led to questioning of trust in such companies.
  • If that wasn’t enough for the angry bear to put aside the knife, another killer move by the bear to injure bulls badly, came with the status quo in the RBI policy (no change in the Repo Rates) which led the Rupee to free fall, thus, making one of the worst performing currency in the world and in the other emerging markets with more than 17% decline in a year after the Turkish Lira.

Such tumultuous events in the last couple of months put fear in minds of investors, thus leading both foreign and domestic investors to sell their stocks in the market at each rise. But for the long-term and to new entrants in the market, this period is the best time to invest in stocks/mutual funds where management stability, performance, and quality are inherited in their existence.

The sweet melon

Bears who injured the bulls badly with the knife, impact the investors’ wealth too. But as a great saying goes: “Good things comes to those who wait”.

So, do the investors who are like the proverbial sweet melon get the benefits from this turmoil or are they going to face this bloodbath again in the future?

The Indian government is planning to majorly reduce the economic dependency on oil consumption by promoting eco-friendly transportation i.e. electric vehicles over petrol/diesel vehicles; further developing strategies to substitute oil and its by-product with ethanol and other bio-gas chemical products.

History suggests, that every big fall or positively speaking, ‘correction’ in the market brings huge opportunities for investors who understand the business model, strengths and the future prospects of such discounted/priced victim companies.

These turmoil periods are an opportunity to grab the carpetbaggers while forgetting the multi-baggers. Carpetbagger is a term used for opportunism. The term was first used during the American Civil War, for Northern Americans who shifted to Southern states for exploiting the locals (as perceived) or those who saw business opportunities during the war.

Thus, to understand it better, we consider carpetbaggers as an opportunity to grab the high-quality stocks at cheaper rates, just like the heavy discount sales during the festive seasons. The reason behind not choosing multi-bagger is the greed which every normal investor looks for but the one who builds the empire buys the one which is left by everyone due to its wrong perception i.e. stock which bleeds badly in the market due to rumors and left by the public in a panic.

Lots of investors, generally lose money in the market because they are always searching for the multi-baggers during the rising market and if they found one then, try to average it out without efficient and effective knowledge about the business model of the company.

Conclusion

Global issues and government policies concerning rising crude oil prices or depreciating rupee will get clear sooner or later but investors need to be conscious of the selection and the money withdrawal process.

Always remember, the country’s policy will keep changing with time and so does development, it’s a fact of law. But, how can the melons i.e. the investors benefit from it? The key to build wealth is to decide what to choose and what not to based on proper study rather than giving importance to market rumors and individuals’ perceptions.

Melons are sweet, so whether they will be cut apart by falling knives or someone else, one needs to understand how to benefit from it rather than being a victim.

Source: Jet Airways GlobalLinker

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