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"The Jambhavan Diaries"

The Emergence of Jhambhavan - Part I

“The inability to predict outliers implies the inability to predict the course of history.” 
― Nassim Nicholas TalebThe Black Swan: The Impact of the Highly Improbable

I am a firm believer in the statement mentioned above. No matter how harder we try, it's almost impossible to predict the future. Niel's Bohr once said, "Prediction is difficult especially about the future." Oil prices are no different.

In 2015, most people believed that the crude oil price would remain at low levels. However, a couple of years later, oil comes back showing signs of hitting higher levels. If we look at figure 1, we observe that oil prices experience a supply and demand mechanism. The vertical lines show the recessions experienced by countries during the corresponding periods. On an average, countries tend to face downturns at least once in every eight to ten years. India seems to be impacted hugely due to high oil prices.

Fig 1. Showing historical crude oil over the past several decades. Source: http://www.macrotrends.net/1369/crude-oil-price-history-chart

Studies have shown that "For every ten dollar increase in per barrel of crude oil, India GDP will be impacted by 0.2 - 0.3%." Especially when crude oil prices reach astronomically high levels, India's current account deficit will widen causing spikes in sovereign bond yields. So what? This impact could transfer to equity markets causing stock prices to correct. The reason could be attributed to the fact the investors tend to prefer asset classes that offer higher yields. In other words, when the sovereign bond yields go up, it makes stocks least attractive; making all the liquidity to move out of the markets. During such times, investors tend to panic because of their portfolio turning negative. However, research has shown that such moments are short-lived and stocks tend to outperform bond yields over an extended period. In the next couple of years, I foresee oil prices to go above $80 per barrel leading to significant impact on Indian equity markets. Such adversity will throw once in a lifetime opportunity for value investors who dare to hunt for ideas that will be resilient and unlock value over a long term.

All I could say now is the entry of 'Jambhavan' (The King of Bears) is imminent, and stock investors should refrain from investing in overvalued stocks and remain selective. At this juncture, capital protection becomes more important than capital appreciation. An investor should always remember that markets will throw a lot of opportunities now and then. Also, if one's loses his or her capital permanently, he or she will never dare to reenter the markets till eternity. Additionally, I am extremely concerned about the quality of investors entering the markets which makes me believe that we are careening towards the end of a historic bull market. Keeping these points in mind, a wise investor will remain conservative and will watch the euphoria fading away. During such corrections, a prudent investor will know to make use of asymmetric opportunities that market will throw at him or her.

Last but not least, if an investor could see the big picture, he or she will be able to vividly see the once in a lifetime opportunity that is going to emerge in Indian markets. Let us gear up for the impending crisis that is looming around the corner. Indeed, "Fortune always favours the braveheart." I would like to close by saying one of the Warren Buffet's quote, "Be greedy when others are fearful be fearful when others are greedy." It is the right time to remain fearful as we observe a lot of novice investors are pumping in liquidity to skyrocket stock prices that will never justify the earnings. I hope we factor in the actual risks and remain cautious until the odds become favorable to us.

Disclaimer: The views expressed in the blog are my own opinion.

 

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