This was posted recently to subscribers of our advisory. Hope you find it useful
We are seeing what I would like to call liquidity crash in markets across the globe
Let me explain
In the last few months, I have been tweeting about inflation going up and prepared this presentation, which I did not post. I laid out my thoughts in the ppt which I created in Dec 2021 and posted a summary on twitter. Judging from the response, most people did not bother about it 😊
As inflation has risen, the Fed and other central banks have raised interest rates. This caused a slowdown in the markets in the last few months
The nifty and other indices have been flat, and several stocks are down in this period.
I think this was the first stage and we have moved into the next phase – that of tightening liquidity. The US fed and central banks have announced a withdrawal of bond buying and other liquidity measures they introduced during the Covid crisis
These measures led to all kinds of asset inflation as liquidity surged across the globe. As this liquidity is withdrawn, we are seeing sudden crashes in asset prices
In the last few months, various tech and SaaS companies have been obliterated. A lot of these company are down 50-90% and the selling hasn’t stopped yet. This is now spreading to other asset classes
We are seeing some early signs in the Indian markets, especially in the small/mid cap space. In the last few days, I am seeing sudden large drops, often for no fundamental or company level reason. This is likely to intensify in the coming weeks and months.
How are we positioned?
This is not new and occurs every few years. What is different this time, is that the Fed and other central banks will not be there to inject liquidity and save the markets. At best, they will continue to deflate the bubble slowly to ensure that markets and economies function properly
We have always been cautious and careful. For example
- We hold 18%+ cash in the model portfolio
- I have consciously kept the position sizes small especially if the company is in the small cap space due to the liquidity risk (the failure in Shemaroo is still fresh in my mind)
- Our larger positions are in companies which are profitable, growing and with reasonable prospects and valuations
The coming weeks and months are going to be painful. I have always stressed on asset allocation to all of you and hope you have managed your equity allocations keeping that in mind. Our risk tolerance will be tested in the coming month
The key is to keep the equity allocation at level where a drop in the portfolio will not cause you to sell in panic. We will be tested on that count
As I have repeated ad-nauseum – Survival is key. There is no point making large gain, if we lose all of it and are forced out of the game. That is already happening to a lot of people
