Saurav Kumar gets up early in the morning. An hour of morning walk and some freehand exercise keep him fresh and invigorated through the day. A typical day for him begins with a look into the WhatsApp groups and Telegram messages. And, then he tunes on to a business channel before picking up the pink paper to know about the markets.
“I adopted the routine during the lockdowns last year. Markets soon became a hobby and now it’s an obsession. I want to be at the top. I’ve diverted some business investments as the markets scaled all-time highs,” he says. But, it’s not really as smooth, as he thought it would be. What pricks Saurav now is the volatility that has gripped the markets after the Covid crisis began easing to some extent.
Saurav is one of the millions who are having palpitations because of the madness in the equity markets. They hitch a ride on the charging bull to book profits and make hefty margins but, within moments, a bear emerges out of nowhere and gnaws them down. Wild corrections often leave them high and dry.
The second wave of the Covid pandemic is seemingly behind us and experts believe that the impact of the third wave would be relatively lesser on the economy. It’ll take a while for the corrections to stop and the markets to settle down. Investors should take this opportunity to enter the market because the outlook for the next few years looks positive.
The major factor that’s fuelling this positivity is strong economic parameters. Most sectors of the economy are shrugging off the Covid blues, consumer spending is on the rise despite an increasing inflation, and the vaccination drive from the government heals the wounded sentiment of people. It’s time for Saurav and investors like him to hold on to their investments and keep faith in the economic indicators.
“I don’t see the markets correcting due to the third wave. Remember, we did not see the third wave impacting market sentiments in the US and the UK,” says Sunil Damania, CIO at MarketsMojo. He stresses on the fact that the market never corrects itself twice for the same reason.
Unlike the onset of the first wave when markets corrected by 35-40 per cent in India and by similar margins across major global markets, partial lockdowns, export surge in certain sectors because of resumption in global growth, strong liquidity flows, and availability of vaccines thwarted a similar impact when the second wave struck. “If you look at the impact of the second wave on the markets, it was fairly muted – around 5-7 per cent – in the in the initial period which then recovered over the next couple of months,” says Dhaval Kapadia, Director for Managed Portfolios at Morningstar Investment Adviser India.
The experts believe that looking at the strong undercurrent, it would not be surprising if the Sensex touches 55,000 by December 2021, a more reason to cheer and invest for Saurav and his ilk.
Markets have both investors Yin and investors Yang. They are loved and hated. The distance between bulls and bears, or volatility, is what drives them. Outlook Money brings to you a panel of India’s top market experts like Deven Choksey, Nilesh Shah, Radhika Gupta, Ashish Shanker and Vijay Kedia to give you an insight on where to invest, how to invest and what to expect from your investments. Edited excerpts:
Where to invest?
Which sectors do you think are safer when it comes to investing with a mid-to-short-term horizon?
Deven Choksey: The preference would be to go with the consumer-facing businesses because they will have one typical advantage of having a larger amount of business and the groups will be achieving more in the next many years. Per capita income is increasing in India and that’s why spending is also increasing. It is one important configuration one should apply while investing.
Nilesh Shah: You don’t invest in equity with a mid-to-short-term horizon. You need a mid-to-long-term horizon. Companies adopting digital ecosystem to create a moat for their business and disrupt competitors’ businesses will do well in the days to come. The story of Apple vs Eastman Kodak, blockbuster vs Netflix, Zerodha vs traditional brokers, will repeat in every sector. We are also bullish on industrials, as we believe there is a massive capex cycle about to begin, led by infrastructure, steel, PLI (Production Linked Incentive) scheme and cement. Industrials will be beneficiary
of the same.
Radhika Gupta: I would not want to comment on sectors that are safer, especially when it comes to a short-term horizon. I think when one is looking at equities, one should always have a long-term horizon, especially in the markets that are not the cheapest. So, I think your time horizons can’t be less than 5 to 7 years. And I don’t think investors really benefit from cherry-picking sectors. You know, of course, there are phases when mid-caps perform well and there are phases when more cyclical companies perform well, but I would say from an investor point of view, my approach would always be more diversified, more broad-based ideas and for much longer terms.
Ashish Shanker: Investment in equities should always be considered with a long-term horizon (minimum of 3 years) to benefit from the power of compounding and to mitigate interim volatility. The sectors should also be considered based on potential earnings growth. For FY22, BFSI and metals (both cyclical sectors) are likely to drive 37 per cent of Nifty earnings growth, followed by IT and consumer. The largest banks are well capitalised, have high provision coverage ratios, and are geared for the next cycle of credit growth. Profits from metals will be augmented by increase in commodity prices and the deleveraging over the last few years. IT and consumer are defensive sectors, which lend stability to the portfolio.
Vijay Kedia: One should invest in a sunrise sector at any cost and stay out of a sunset sector at any cost. Many sectors seem to be turning around. I think the time for IT products and telecom products has arrived. India has established a name in services but we are zero so far products manufacturing is concerned. Because development of products needs years of hard work, research and development, billions of dollars to invest and, even then, chances of getting obsolete is very high. A few companies have developed these products from a fraction of billions of dollars and those are getting an acceptance in the international market. That’s a big opportunity.
Which instruments do you think are best and safest for the investor in this volatile market?
Deven Choksey: Equity over a period of time yields volatility. When you want to see growth in your investment and weed out volatility, the safer thing is to invest for a longer period as it helps in reducing volatility.
Nilesh Shah: Safety is a state of mind. If you know that equity can go down, then drop in equity is still safe for you. If you do not know that bank deposits can give negative real return, then it is not safe for you. Power of knowledge removes the darkness of ignorance and gives you safety. If you know how to pick stocks, then direct investment in right companies is the best instrument. Otherwise, mutual funds are best.
Radhika Gupta: I think two things investors have to keep in mind. One is quality, if they are doing, debt or equity instruments, then they really have to focus on quality. So, do not stretch the boundaries of credit and fixed income, and do not stretch the boundaries of quality in equity. Two, I think investors can really benefit from hybrid instruments, which include funds like Balanced Advantage Funds, Equity Savings Funds, essentially funds that are not 100 per cent equity but combined equity and debt, so they have the benefit of safety and growth.
Ashish Shanker: From an ease of operations perspective, mutual funds are the most efficient instruments for investment into various asset classes, including equity, fixed income and gold. For UHNW/HNW investors, other platforms such as PMS, AIF can be included in the portfolio since they are more bottom-up strategies; benchmark-agnostic. We suggest that investors should always follow an asset allocation approach with a long-term horizon.
Vijay Kedia: Safest and securest is investing through mutual funds. Direct investing needs years of experience and a strong mind to face anxiety and trauma. Everybody is not cut out for that. I apply my formula – KYS (Know Yourself) is more important than filling KYC (Know Your Client).
Which asset classes are best suited in this volatile time in terms of return on investments?
Deven Choksey: I think better would be to stay with equity because we have liquidity also at the same time. The rest of the asset classes are equally volatile so I think equity also gives you liquidity.
Nilesh Shah: You have to build a portfolio looking at your risk profile and investment objective. At this point of time, we are overweight on gold and offshore funds. Equal weight to equity and short-duration debt. Underweight to long-duration debt.
Radhika Gupta: I think it is very important that during this time to have your asset allocation intact. Whether you do it through funds like hybrid funds or by managing your own asset allocation. I think having a mix of local and global equity, fixed income, and inflation hedging asset classes like gold is extremely important.
Ashish Shanker: A combination of asset classes is always preferred within a portfolio. Given the prevailing low yields on fixed income, it would be prudent to also have reasonable equity allocation given expectation of strong earnings growth. Around 10-20 per cent of the portfolio can be invested in gold to hedge against volatility.
How to invest?
What kind of investment horizon should one look for in this situation? Should it be a short-term perspective and wait for correction in the market or a long-term perspective with an eye on stability?
Deven Choksey: I think the typical approach would be to have a long-term perspective and keep investing regularly because investing should not be for a shorter period but it should be on a regular basis.
Nilesh Shah: You can only trade with a short-term horizon. You cannot invest without a long-term horizon.
Radhika Gupta: I think if you are eyeing equity investments, today you definitely need to have a five-year horizon. I think investing in equity is the most dangerous thing that you can do is look at one-year returns and shorten your time horizon, so I would definitely recommend that people shouldn’t look out for that. In your aggregate portfolio, match your investment horizon to the kind of goals you have.
Ashish Shanker: The most successful Equity investors have always advocated ‘Time in the Market’ rather than ‘timing the market’. Hence, equity allocations should be made with at least a three-year horizon. In the prevailing scenario, investors could look at staggering their allocations over the next two-three months while taking advantage of any sharp correction in the interim.
Vijay Kedia: Horizon is always the same. Investing is only for the long term and my long term starts from three-five years. One should have a five-to-ten-year approach while investing directly and a ten-year-to-lifetime approach in mutual funds. Ask yourself what horizon you have when buying jewellery for yourself. Investing is a risky business and my approach is risky. Buy whenever you identify a stock and have an appetite to see 20-25 per cent fall in that stock.
How should one distribute assets across various instruments with a two-three-year perspective?
Deven Choksey: Instrument I think is need-based. Suppose you are of a younger age, equity suits you better but you if you are in middle age, a combination of equity and fixed income would be better.
Nilesh Shah: One should invest across short-duration fixed income, gold and balance advantage fund or asset allocator fund with a two-to-three-year horizon.
Radhika Gupta: I will re-stress on the time horizon. Two-three years’ investments cannot be equity investments. I think for this time horizon, the investments you need to have either fixed-income investments or more conservative hybrid investments.
Ashish Shanker: The most important step is to put together an investment charter, which is a portfolio guidance document that details the risk-profile, asset allocation, time horizon, cash flow requirements and so on. As a thumb rule, equity allocation could be 0-20 per cent for conservative investors, up to 50 per cent for moderate-risk investors, and 70-100 per cent for aggressive investors.
Vijay Kedia: Investing for two-three years is more risky or disappointing than investing for 10 years. However, it depends on your own mindset.
What strategy should be followed while making investments now?
Deven Choksey: You should have a long-time horizon in mind. Without that one should not be investing. Second aspect is keeping liquidity into the account. Without liquidity, investing is of no use. I do think many a times people end up investing in instruments which are in liquid. Another important aspect is putting up your money in businesses that have outlook for the next few years.
Nilesh Shah: Disciplined asset allocation, regular investment and long-term investment is the best tool to invest during volatile times.
Radhika Gupta: I would suggest to stick to your goals, first. Second, chase quality. Third, do not do something just because someone else is doing it. I think these are times when, FOMO (fear of missing out) really kicks in. And we do something, even though it may not be a fit for us, because we see our friend or neighbour doing it. Don’t do that. And fourth, don’t panic.
Ashish Shanker: For equity investors, a staggered investment approach over the next two-three months, and taking advantage of any interim corrections would be preferred.
Vijay Kedia: Buy the stock of the company whose business you understand and you can visualise the future growth. Buying on tips and rumours is like giving your life in someone’s hand.
How should an investor time his buying and selling of stocks when the markets are wild?
Deven Choksey: Timing has never worked for anyone in the world. I think timing is a bad idea. What one should do is invest regularly because regular investment will even out volatility and also help you in investing and building assets for a longer period of time.
Nilesh Shah: One should be a buyer below fair value and seller about fair value. If you don’t know what is fair value then you should not invest directly in stock markets. It will be appropriate to go to a financial advisor and get a financial plan for achieving investment objectives.
Radhika Gupta: I think an investor should stop buying stocks. I think investors do a terrible job at timing and we all love activity, especially when markets are volatile. Do remember you’re not buying stocks you’re buying underlying businesses. If you’re buying a business and a good business, at a reasonable price, you should do that and when that business is no longer better than the price, perhaps that is the opportunity to sell it. Real money is made buying good businesses and holding them.
Ashish Shanker: It is extremely difficult to time entry and exit from stocks. Hence, before purchasing the stock, investors should ensure that the underlying company has quality management, healthy earnings expectations and that the stock is available at reasonable valuations.
Vijay Kedia: When there is a party and everybody is dancing, you should also dance but do not get drunk. Timing the market is like timing your own emotions that is very difficult at least for me.
What to expect?
What kind of return an investor may expect given the ongoing market volatility?
Deven Choksey: Our markets, broader markets in general, have always given 15-16 per cent CAGR return over last 25-30 years. In my views, it is a safe aspect in India also for the next few years because the economy is growing, in fact it is doubling in the next four-five years, I think if that rate of growth continues, then you should be safe. Broader markets should end up giving 15-16 per cent return easily.
Nilesh Shah: Market returns, fund returns and investor returns are different. You have to select the fund which will outperform the market. Your allocation to the right fund should also be appropriate to make money. You also need to be invested for sufficient time to make return. Investor returns will be a function of allocation of right amount, selection of right fund and length of time given to investment.
Radhika Gupta: I think investors should have moderate return expectations and I always get in trouble for saying this, I think, low double digits for large-cap equities at a couple of per cent for mid-cap equities, is the best that you can expect. And I think there is a reasonable return expectation given that you also live in a reasonably low interest-rate environment, all over the world.
Ashish Shanker: In the long term, equity market performance tends to be in line with underlying earnings growth. Earnings growth should typically be slightly higher than nominal GDP (real GDP plus inflation). Hence, if India’s nominal GDP is expected to average at 10-12 per cent over the next three-five years, then earnings growth could average 12-15 per cent in the same time period, with similar compounding expectations from the equity market.
Vijay Kedia: Volatility and listlessness are the two faces of the market. Investing is a business. Keeping that in mind, if you are getting above 12 per cent annual return, you are doing great.
Stocks are often considered to be inflation-beaters. What can an investor expect from his equity investments under the rising inflationary pressure?
Deven Choksey: Equity is an instrument that helps you beat inflation. And beating inflation with a margin. So, if real growth of inflation is say, for example, 10-11 per cent, then equity ends up giving you 14-16 per cent returns. To hedge inflation, equity is the best instrument.
Nilesh Shah: If you pick right stocks, it will outperform inflation. If you pick wrong stocks, they will fall with inflation.
Radhika Gupta: I think if you’re living in an environment of high inflation, then just sitting in fixed income is not an option, which is why I think equity is a must in your portfolio, but given the risk in equity, one of the things that we are recommending to our investors is an intermediate option of hybrid funds. So, funds like balanced advantage or equity savings work really well.
Ashish Shanker: Historically, central banks have resorted to increasing interest rates to combat rising inflation. Rising interest rates lead to higher cost of capital, which can be detrimental for equity market valuations. However, in the current context, given economic growth concerns, central banks are likely to be more tolerant to higher inflation prints. Consequently, equity markets could continue to remain buoyant in the absence of other higher-return alternatives. Return expectations would be in line with the response to the previous question.
Vijay Kedia: Factors like inflation, interest rates, FIIs selling or buying, spike in oil price, dollar and monsoon often dictate the stock market. They appear every now and then. They have no influence on a long-term investment. They adjust themselves.
How do you expect the market to behave over the next six months? Do you foresee any major correction in the market or in any specific counter?
Deven Choksey: In my view, broader market will have some kind of time correction because time correction has not been happening at a major level. But it will also be an opportunity to buy particularly into high-growth stocks and we would probably see money coming into more companies.
Nilesh Shah: I don’t know how to predict markets. All I can say with my three decades of learning is that it will go up and down. Market is a discounting machine that keeps on discounting all the information and data. Market has built a hypothesis that there will be higher corporate profits as economic activities will normalise and the third wave will be less ferocious than the second wave. If that hypothesis is not proven correct, then markets may fall.
Radhika Gupta: Nobody can predict the market. We are living in extremely volatile times with the second wave behind us, and you know vaccines are sort of bringing normalcy world over. We can’t rule the fact of the third wave, but it is really impossible to predict.
Ashish Shanker: In the prevailing scenario, there are concerns on rising commodity prices, higher inflation prints, high valuations and potential interest rate increases going forward. At the same time, the pace of vaccination has picked up, several high frequency macro-economic indicators (like power consumption, exports, auto fuel demand) have recovered, corporate commentary has turned positive, and following up from FY21, we expect double-digit earnings growth in FY22 as well. With the economic activities expected to pick up going forward, we hope that the equity market will remain buoyant, and any interim correction should be viewed as an investment opportunity.
Vijay Kedia: I don’t know any astrologer who can predict that. If I get to know I won’t believe him. Having said that, I always know that a rising market can fall anytime and a falling market can rise anytime. Like sunrise and sunset there’s no fixed time.
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What? If Not Equities?
Risk-averse investors can include mutual funds and bond funds in their portfolio to avoid the risks arising out of direct investing, according to Palka Chopra, Senior Vice-President at Master Capital Services. For investors who do not wish to invest in FD’s but are looking for tax efficiency, short-term bonds can be an attractive option. Similarly, depending upon their investment horizon one can invest in small saving instruments.
Stick to one’s asset allocation plan as short term market movements are notoriously difficult to predict as we’ve seen over the last 12 to 15 months. In case of sharp market corrections, long-term investors can add further equities to their portfolios. “At least 10 per cent to 20 per cent of one’s portfolio can be diversified globally including US, Europe and other Emerging markets,” says Dhaval Kapadia, Director for Managed Portfolios at Morningstar Investment Adviser India.
“Investors must maintain their financial (investing) discipline and never bring in emergency or contingency money to enter into the stock markets,” says Sunil Damania, CIO at MarketsMojo.
Therefore, invest in equities only for a minimum of three-five years and never borrow money to invest in the equity markets.
With inputs from Manik Kumar Malakar