What not to do when stock markets crash?

Markets this week 📊

The US Fed’s resolve to fight inflation has continued to spook Indian markets. Domestic equities did not give the new year cheer that we were hoping for. 

It’s time for Q3 earnings to unfold and will be the major driver for stocks going ahead this month. Hopefully, Q2 woes of high input costs and margin pressures are behind us. IT will be the first to come out with its report card and may throw some optimism post tough cost measures are taken. A weak global outlook may however continue to take some sheen away as with other export-driven sectors. 

Strong pent-up demand post-pandemic will also start to moderate now. This along with lower inflation will temper revenue expansion in the quarters ahead. Plus, rural demand is still foggy and will reflect in some FMCG and 2-wheeler numbers. 

Our advice would be to keep a close watch on management commentary and reset expectations. These would give good cues for picking good quality stocks for a longer-term bet. 

In case you are still confused about whether to stay away or do some bottom fishing, read our money section below. Also, write to us at advice@tavaga.com about any of your portfolio concerns and we shall be happy to help. 

Let’s now dig deep into some of the important news that made headlines this week.

2-wheeler sales still under the weather 🛵

What’s wrong? Dec month saw all leading 2-wheeler firms reporting a sales drop, both QoQ and YoY. While 4-wheelers are flourishing, their smaller cousins are struggling to grow beyond pre-pandemic levels.

Sluggishness continues: Rural demand has been a laggard. Sentiments are turning positive but have yet to translate into fresh purchases. Exports were hit too due to muted mood worldwide, impacting Bajaj Autos massively (exports form >50% of sales). After a couple of months of improvement, a weak December is a setback for forecasters hoping for a rebound in 2023. As per dealers, despite festive recovery during Sept-Nov, inventory was averaging at 6-8 weeks for some firms with higher exposure to entry-level vehicles. Layoffs and cost pressures have also led to a demand for caution amongst the salaried community. All of these factors have combined to create a perfect storm for the 2W industry.

Our Take

Gone are the days when two-wheelers were the undisputed kings of the road. The question is, when is a turnaround likely? 

The pain would likely persist for another 1-2 quarters before the economy gets a kicker from robust demand and improved affordability and as recessionary fears overturn. 

WORLD

Musk + Twitter = Teslump 📉

What happened: Tesla’s stock plummeted more than 12% early this week. Reason: Despite sending out a record 405,278 vehicles in Q4 2022, Tesla disappointed analyst expectations and missed its own growth goal for the year.

$200 billion loss: This selloff was the continuation of a brutal downward crash of the most valuable automaker in the world. Tesla’s share price dropped over 70% in 2022. Back in Dec’21, the M-cap of Tesla had peaked at a massive $1.2 trillion, greater than the value of Toyota, Volkswagen, Mercedes-Benz, GM and Ford combined. It has now slumped to just US$340 billion. It has also fallen out of the S&P 500 Index’s top 10 companies and currently faces increased competition from legacy carmakers and other EV players.

Elon Musk has effectively become the first person ever to lose $200 billion from his net worth, as per Bloomberg.

Our Take

It may be easy to blame this Tesla situation on Musk’s distraction at Twitter and because he himself sold roughly $40 billion of Tesla stock.

But the problem is more deep-rooted than it appears to be.

Production slowdown due to Covid shutdowns in China, weak demand, and increased competition have been some of the reasons. 

TECH

Mamaearth IPO: Another pump and dump? 👎

Limelight: Beauty and personal care company Mamaearth announced its ₹2,900 cr IPO. Ever since the company filed its DRHP, it has been in the news. Sky-high valuations, exorbitant marketing spends, and inconsistent profits for this Shark Tank famed company have been questioned by many on social media. If Mamaearth’s IPO materialises, this 7-year-old firm would become one of the youngest Indian startups to go public.

“Paytm & Zomato in the making”? Mamaearth became a unicorn in Jan last year with a valuation of $1.2 billion, aiming for a target market cap of $3 billion post-IPO. Now that seems like a very BIG ask against a net profit of merely ₹14cr in FY22 and losses of ₹1,332 cr and 428 cr in the previous 2 years. That translates to a PE ratio of 1,714x compared to 50-60x for the bigger FMCG giants. 40% of revenues are spent on marketing but revenues earned for every rupee spent on advertising (ROAS) has not improved from 2.6 over the past 3 years, meaning few repeat customers. FYI, for Nykaa this metric stood at 7.8 and for big boy HUL at 10.6.

Another pump and dump? After massive wealth destruction suffered from several tech-IPOs in the last 18 months, it is high time that bankers & regulators scrutinise these issues. Paytm, Zomato, and Nykaa have all collapsed 50%-70% since their listing, transitioning from stock darlings to social media memes. The fact that this offer is also predominantly an offer for sale by existing shareholders also acts as a red flag.

Our Take

The majority of these new-age tech players remain loss-making for a longer period before achieving break-even. But till then a private equity mindset is more suited for companies with the patience and capital muscle.

SEBI is also trying to get its act together and demanding more transparent disclosures and valuation rationale. A case in point is Oyo who has been asked to refile IPO papers with more details sought.  

The retail junta have learnt it the harder way and will (hopefully) not make the same mistake twice. If you cannot be brilliant, at least do not be stupid.

MONEY MATTERS 💰

What not to do when stock markets crash?

We are just a week into the new year and markets have already corrected by 2%. Most global economists have predicted a difficult year ahead, pulling down forecasts. Amidst all such negativity, here we have banks giving guaranteed FD returns of 6-7%. What should retail investors do?

Our Take

It is very difficult to predict accurately how macro conditions will play out. It is also difficult to pre-empt how will markets react to these developments. Equities as an asset class are risky investments but have historically given the best returns over the longer term. However, it is normal for stock markets to experience fluctuations in the short term. If you are a retail investor, here are a few things you could consider doing:

Don’t panic: It is important to remain calm during a market crash and not make any impulsive decisions. While it may be tempting to sell all your stocks when the market crashes, it may not always be the best decision. Financial acumen is vital in investing but keeping emotions under control is even more important.  

Do not obsessively track markets and your portfolio. Assess the impact of the market crash on your investments. While most investors tend to stay away from markets during times like these, they should rather utilize these market drawdowns to pick up quality stocks that have corrected.

Do not rely on social media noise: Consult a financial advisor instead. If you are not sure what to do, consider consulting with a financial advisor. They can help you understand the situation and suggest the best course of action.

Do not put all your eggs in one basket: A well-diversified portfolio is crucial to mitigate the impact of market fluctuations. If your portfolio is not diversified, consider reallocating your investments to spread out the risk.

Do not stop your SIPs: If you have a long-term investment horizon, consider staying invested in the market. Historically, stock markets have recovered from crashes and gone on to achieve new highs. Apart from SIPs, make staggered lumpsum investments every time there’s a major dip in the indices. 

Are you also worried about the reds in your portfolio and confused about how to plan your investments for 2023? Write to us at advice@tavaga.com and we shall handhold you through. 

What else made the news?

📝Taxing time: Walmart and other PhonePe shareholders have to pay ~$1 billion in taxes after relocating from Singapore to India, as per reports

🙊Lies: WHO says China’s official data on Covid19 surge and deaths are grossly inaccurate and under-reported.

👊Manufacturing boom: December manufacturing PMI, an index that tracks input purchasing plans of companies to gauge factory activity, hit a 26-month high.

✅Clean chit: Supreme court upheld demonetisation in 2016, dismissing petitions challenging the legality of the decision

😭Unhappy New Year: IMF chief said that a third of the world will be in recession in 2023

Hope you liked reading this week’s wrap. See you next week. Till then, hope you have a great weekend!

Cheers,

Ruchi Mehta

https://www.linkedin.com/in/ruchimehta-tavaga/

Disclaimer: This write-up is solely for educational purposes. This in no way should be construed as a buy/sell recommendation. Please consult your investment advisor before investing.

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