‘If individual stocks start falling 25% to 30% or more, then I doubt how many of them will be able to withstand that (kind of selloff). That is when you’ll see panic coming in.’
Independent market analyst Ambareesh Baliga expressly beseeches retail and SIP investors to take some money off the table, especially, in mid-cap and small-cap segments where returns over the last 18 months have been exponential.
The Indian equity markets fell more than two per cent in one session — the benchmarks 30-share Sensex shaved off 2.2 per cent while the Nifty 50 index cooled off 2 per cent — on January 17, a day after HDFC Bank, India’s largest private sector bank, declared its earnings for three months between October 1, 2023 and December 31, 2023.
In this two-part, must-read interview, Baliga tells Prasanna D Zore/Rediff.com what spooked the markets leading to a frenzied selloff in the financials — the Bank Nifty, an index comprising of 12 private and public sector banks, and the Nifty Financial Services Index, comprising of banks, NBFCs and insurance companies each cracked 4.28 per cent on an eventful day that saw a huge drain on investors’ wealth.
“Every time there’s a correction, people came in, bought, they made money. That is very clearly entrenched in the minds of the new investors, which today form a bulk and they are able to move the market as a unit (like the Foreign Institutional Investors or Domestic Institutional Investors).
“Now, if we see the markets correcting for say another 300 points, possibly another 250 points day after, then that is what can finally unnerve these new investors,” cautions Baliga.
Investors in HDFC Bank, which fell 8.5 per cent on January 17, lost as much as Rs 1 lakh crore in one single session.
The market crash of January 17 had HDFC Bank written all over it. What exactly did the market get spooked by?
The market got spooked only after the management call (of HDFC Bank), not with their earnings.
People (FIIs and analysts) were looking at various parameters for HDFC Bank normalising maybe from this quarter or next (quarter) post-merger (with HDFC Ltd which came into effect on July 1, 2023).
It was expected that post-merger there would be some issues, at least for two to three quarters or maybe slightly more, but now it’s getting extended. And at the same time, the deposit growth (of most banks) is not happening as expected.
NIMs (Net interest margins — a financial ratio that reflects a bank’s profitability as percentage of deposits — for HDFC Bank as reported in its quarterly result declared on January 16) have fallen more than expected.
Looking at all this, I think the analysts and investors who attended the call, I think got a bit worried.
Was the market fall an overreaction?
An overreaction as far as HDFC Bank is concerned (HDFC Bank pared 8 per cent of its gains on January 17 to close at 1537.50 on the Nifty as compared to its closing price of Rs 1679.15 on January 16, the day when HDFC Bank declared its Q3 earnings).
And talking about the broader markets, what happened there?
Broader markets were overvalued for a long time. When I say a long time, I’m talking of the last couple of months. Basically, markets needed a reason to correct because valuations were expensive; they’re getting more expensive because of liquidity flows, and it was in a virtuous cycle.
But then this (HDFC Bank results failing to meet analysts’ expectations) has brought in that crack.
HDFC Bank was possibly one of the reasons because it has a good weightage in the Nifty and got a very high weightage in the Bank index (the 50-share benchmark Nifty fell by more than 2 per cent and the banking index called the Bank Nifty cracked 4.28 per cent on January 17).
Since it (HDFC Bank) has a high weightage on Bank Nifty, it affected the other banking stocks also.
For the fall, yes HDFC Bank (results) was one of the reasons and because of its weightage in the index. But since overnight the global markets were down because of the China GDP issue, a hawkish US Fed (the US Federal Reserve is not showing any signs of cutting interest rates there which ultimately leads to money flowing out of emerging markets to the US in search of better risk-free returns).
Now it’s distinctly clear that it (rate cuts in the US) will happen possibly in the last quarter of (calendar year 2024, which is December 2024).
People were expecting it to be the first half (of calendar year 2024 which is the first six months of this year). Forget the first half. May not be the third quarter (of calendar year 2024 which is July-September 2024), maybe the fourth quarter.
And to add to it by 10.30-11 am (on January 17) we heard about Iran firing a missile (inside Pakistan). I think that did it finally. That was the one which spoiled the sentiment. But what broke the Bank Nifty was possibly HDFC Bank.
All private sector banks were in a tailspin. Why should failure to meet expectations of one bank result in the fall of other banking companies?
If you compare the banks, there is no reason for the other banks to follow because there is an issue with HDFC Bank-HDFC merger and not with the (banking) sector as such.
There could be two issues with the sector: One is on the NIMs front. The NIMs have more or less topped out for all the banks. For some banks the NIMs topped out in Q1 (the first quarter for which results of a financial year are declared by most companies begins April 1 and ends on June 30), others possibly topped out in Q2 (quarter beginning July 1 and ending September 30).
So I don’t think in Q3 (the quarter beginning October 1 and ending December 31 for which HDFC Bank declared results on January 16, 2023) you’re expecting any of the NIMs to move up. So that thing is clear and it’s already discounted (reflected) to a large extent (in the current stock market price of banking companies).
The other thing is because the markets were doing so extremely well and the sort of SIPs which we have seen going into mutual funds, and SIPs is only one part of it because there are a lot of investors who are also investing directly into the markets.
So where is all that money coming from (into the markets as SIP and direct equity investments)? It’s basically savings. Savings which would have gone into a savings account or an FD is moving into markets. So that way the deposit growth for the banking sector was coming under pressure.
So is there a structural problem here if fixed deposits and household savings are being diverted towards investing in the markets?
To a certain extent yes, but that’s not a big blow. That can be an issue going ahead as more and more people get into the markets.
But CASA (current account savings account) deposits for banks have always been their major strength and that’s how they could contain their costs and improve profitability?
Exactly. When your costs are going up you may have to pay more (for attracting CASA deposits), you’ll have to pay higher interest and so your NIMs will suffer anyways.
Following the banking pack, the real estate and auto indices also had good correction today. Is it because the cost of money is likely to increase? As you said, the US Fed is not in the mood to cut interest rates till the end of this calendar year.
Because that (the rate cuts by the US Fed) was expected to happen soon, the markets were discounting it earlier (because of which the markets were hitting all-time fresh highs throughout calendar year 2023) saying that that’s going to happen soon. Now if it’s not going to happen, at least for a while, you have to have a reversal, isn’t it?
Should investors now avoid the banking, realty and auto sectors considering the headwinds for these sectors?
I wouldn’t say avoid, but I would say wait (if one wants to buy stocks belonging to these sectors). Overall, the markets had gotten expensive and now that there has been some reason for the markets to correct — and I don’t know by how much they will correct going ahead. We’ll have to see as to how much more the market correct in the next one or two days.
If the same pace continues, then there can be panic because the markets were supported by domestic retail investors as well as the HNIs (high net worth individuals). After that it was the local funds, including the mutual funds which are flush with money because of the SIPs.
Do you think these SIPs will ever stop or their flows into the market lessen in the months to come?
If you had asked me this question five years back I would have possibly said no. SIP is lazy money. The money which comes in and stays (invested for the long term).
Normally, when a person gives a blanket sort of a permission to the bank, to deduct ECS, then you would not like to go to the bank, change the ECS mandate, you’ll say it is there, let it be for a while.
So people wouldn’t have changed the SIP or would have stopped SIP (five years ago).
Today, the scenario is different. Today, it’s just a click of a button for you on your mobile phone to start or stop a SIP. Now my answer is different for this (question) because if people panic, it’s just a press of button and the SIP stops. So that can happen now.
Also, people have been making tons of money, much beyond their expectations over the last 18 months or 24 months or more. Even in SIPs depending on when they started investing.
Any sort of a correction, including a correction which we have seen — and we have seen corrections of 300 points (in Nifty) also in the past — has been seen as a discount sale and people have come and bought. And they made money every time.
Every time there’s a correction, people came in, bought, they made money. That is very clearly entrenched in the minds of the new investors, which today form a bulk and they are able to move the market as a unit (like the Foreign Institutional Investors or Domestic Institutional Investors).
Now, if we see the markets correcting for whatever other reason — yesterday (on January 16) no one would have imagined that Iran would be firing a missile (on Pakistan January 17); so all these are those unknown events — if the market falls further, say another 300 points tomorrow (January 18), possibly another 250 points day after then that is what can finally unnerve these new investors.
Because once they see that despite their buying, the market is still falling further — now it is not anybody’s case that only the SIP and retail investors’ money is moving the markets — or the markets are not bouncing back like on previous occasions then somewhere they will start panicking.
Whenever the valuations are decent, any such incidents or things (poor quarterly results of bluechip companies, or geopolitical tensions, etc) come up. then markets do not fall too much because end of the day, there’s some cushion.
There’s something called valuation at the end of the day. But today you are at 3X and the valuation is at 1X (markets are thrice as overheated as they should be like the case today with Nifty and Sensex), so you have that much to fall.
(If that kind of fall happens in the coming days) then these new investors will not be able to digest that sort of a fall.
If individual stocks start falling 25 per cent to 30 per cent or more, then I doubt how many of them will be able to withstand that (kind of selloff). That is when you’ll see panic coming in.
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