Investors’ Guide
1. Check sector indices to figure out the money flows; seek strong mid-caps; buy PSU stocks for a longer horizon
2. Analyse quarterly results to identify growth stocks; buy frontline stocks on corrections, if you have money; book profits regularly
3. Avoid markets now if you are averse to risks and regular volatility; not-so-savvy investors have to seek expert advice
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The economy is yet to recover from the Coronavirus blow entirely. Yet benchmark indices, after recouping all losses suffered earlier are trading at new highs. It has created doubts among retail investors as some lost hard-earned money while others made good moolah. The mathematics doesn’t seem to match.
Meet Yash Vishwanath Bodade (18), from Nashik in Maharashtra. Earlier this year, before the stock markets went into dizzy runs, Yash received Rs 2 lakh as seed capital. Of this, he parked 50 per cent in delivery-based investing and the rest in options trading. He followed a disciplined approach and stuck with a research outfit he trusted. He executed 32 delivery-based buying trades and made Rs 42,000 profits on his Rs 1 lakh investment. That’s a whopping 42 per cent in less than 10 months. The hyper volatility witnessed in the stock market during early 2020 was a life-time experience for Hriday Bajaj (26). He had joined his father’s Kolkata-based sub-broking in December 2019. A wise Hriday now says, “The stock market is a double-edged sword. One can earn quick money, but at the same time, lose money with double the speed.”
Not everyone has been as fortunate as Yash. Many, not disciplined, or with no access to expert guidance, lost money and faith. Some closed doors to equity. Others can’t figure out what to do next. To withdraw or remain invested?
Lack of clarity on the future of the Indian economy, which has officially entered a recession, has fueled uncertainty in the stock markets. Real Gross Domestic Product (GDP) for the September quarter contracted 7.5 per cent year-on-year. Retail inflation was a six-year high of 7.61 per cent in October, and Reserve Bank of India (RBI) has cast doubt over sustainability of demand after festivals. Ratings firm, ICRA, revised its GDP forecast for 2020-21 to a contraction of 9.5 per cent.
Yet, a silver lining among a series of gloomy developments over the past several months seems to have emerged. Goods and Service Tax (GST) collection crossed the pre-COVID level. Farm, manufacturing, coal and power sectors improved. Export registered growth, and passenger car sales have been growing. Economist, Rajat K Bose says amidst the uncertainties, sectors like cement, steel, construction, technology, food, agriculture and defence equipment are expected to fare better than others in the medium term.
Rajesh Baheti, Managing Director, Crosseas Capital, says that the economy is down primarily because parts of the services sector like hospitality, support services and retail received a blow during the pandemic. Manufacturing or information technology, for various reasons, have not been hit as bad.
Bose says, “Chances are the conflict with China and Pakistan might escalate affecting both economic policy-making as well as economic performance. Rising NPAs could come in the way of normal bank lending and demand for funds by the government could crowd out private investors. Consumption led demand growth might not be as good as envisaged. Rising retail inflation might prevent the central bank from further easing on interest rates.”
Vivek Mahajan, a technical analyst, says that retail investors could not believe in the rally and were hesitant to participate. The underlying fundamentals of either the sectors or the economy were not commensurate with valuations of stocks. Added to this were the IMF and World Bank’s indications that economies will drag on till the end of 2021.
Many economies are still fragile, and every central bank will continue supporting them as long as is necessary, at least, in the short run. Investors need to keep a watch on inflation numbers around the world. In India, till last year, the central bank – RBI was comfortable up to 4 per cent inflation rate. Despite rising costs, the apex bank was aggressive with rate cuts. This may not be worrisome as inflation, till October, was fueled by a narrow basket of items, and their prices are likely to slow down as winter arrives.
In October food inflation crossed 11 per cent. Vegetable prices rose 22.51 per cent, pulses 18 per cent, egg 21.81 per cent, and meat and fish 18.7 per cent. In winter, food prices are likely to soften and may encourage RBI to keep its liquidity tap open. The Centre may adopt flexible inflation targeting regime, within 2-6 per cent, rather than a prefixed figure.
The domestic inflation rate doesn’t seem worrisome in the short run, and the World Bank expects global inflation to remain relatively low. For the advanced economy group, it is projected at 0.8 per cent in 2020, rising to1.6 per cent in 2021 as recovery gains hold, and broadly stabilising at 1.9 per cent later.
“The minute you see global inflation going up, you will see red flags,” says Baheti. If that were to happen, central banks would hike interest rates, and the money supply may find other avenues of investment. In the domestic market, it will lead to corrections.
In the short run, Baheti suggests, one could follow the money. “If it is moving to the financial sector, pick up three or four leading financial names. Sectoral indices provide a better view of the money flows. Buy a basket of two-three frontline names but stick to the most liquid ones because money chases these.”
At present, one need not necessarily look at parameters other than the fund supply. “But be very fleet-footed. Massive correction may follow a flight of funds. The moment you get a warning, exit and then wait for an opportunity,” he says.
“If you have investible funds, you will get plenty of opportunities. It is always better to miss one bus than get into a wrong one that can take you to the opposite direction. Better wait, keep your money in tap – keep it liquid and you will get a good opportunity,” he says.
He expects the Nifty to touch 14,000 level shortly. During the last several months, retail investors have been shy – they were not trusting the rally. He expects volatility in the markets to rise soon, and it could be a minimum of 2000-2500 points for the Nifty up to 10,000.
Once corrections revalue stock prices, investors may get the opportunity for good picks. They could select sectors doing well or the sectors that did not participate in the recent rally. Or are expected to participate in the future.
Anup Khandelwal, President, ANMI-Association for National Stock Exchanges of India, however, feels latest data indicates a recovery albeit a slow one. “In the last one and a half year, technology, pharmaceutical and chemical have participated in the stock market,” he says.
According to Mahajan, pharma and IT will continue to exhibit healthy growth as long as the pandemic keeps disrupting lifestyles. Fear will hold demand for medicines steady. IT and telecom, on the other hand, have become a way of life with WFH. They will continue to remain strong.
Every industry follows a business cycle, and analysts expect these industries to catch up too. Sectors, including steel and cement fueled by a rise in real estate, could see rising demand in three months. A 3-5 years horizon would be long enough to book capital appreciation.
The good news, however, is that prices of steel and cement have stabilised. The monsoon was good, crop output may be high, and MSP is on the higher side. Higher farmer income will boost farmers’ purchasing power creating demand.
If a section of retail investors have money to spare and can wait, 10-15 per cent of their stock portfolio should go into top PSU banks for the long term, suggests Mahajan.
As a contrarian, one could pick up large PSU bank stocks, which have not performed at all in the last few months, he suggests. “Investors are still not daring to buy them. Or those who had bought them at higher levels are so exhausted that they cannot buy more or are unwilling,” says Mahajan. “These are likely to be money-spinners, if purchased at current levels for a one-three year horizon.’’
Investors with money locked in depressed stocks may be able to recover some losses as the index has zoomed, feels Mahajan. “If these stocks have regained during the recent run, yet not been able to make up losses, it’s much better to switch over to performing ones only on a correction,” he suggests. “No point keeping capital locked up in dark stocks.”
“So my suggestion is to analyse quarterly results, and try and identify stocks based on overall growth,” he says. Investors must build a portfolio of quality businesses and need to analyse at least last three quarterly results for any stock. No growth in sales or quarterly margins or change in debt require analyses of specific parameters.
Retail investors not too savvy with equities, having less knowledge of the stock market, or fundamentals, should train themselves up. One can utilise various resources and points of guidance which are available. “Alternatively one could act under expert guidance,” says Mahajan.
According to Baheti, in the long run, comparing valuation to underlying parameters matter. “This part, however, requires in-depth research into businesses and companies. It is best left to fund managers for 5-10 years.”
In the long run — between five and 10 years — markets get aligned with performance and value. But then again, as Mahajan puts it, a threat from China can see the Nifty drop to 7000. It is not going to be an easy ride. The roller-coaster journey will continue. The only thing in your favour will be your instinct, intelligence, and interest. Risks are inevitable and unavoidable. Stay away, and stay put if you don’t have the stomach for them.
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GDP Growth (Q2) -7.5%
The economy is down primarily because of the services sector. Segments like hospitality, retail, and support services suffered. Manufacturing and technology managed to chug along. IMF and World Bank contend that global economies will be down till the end of 2021. One has to contend with the second wave of Covid in the US and Europe
Agriculture (Q1) 3.4%
Monsoon was good this year, and the next cropping season is likely to be good. The farm sector will witness positive growth, despite the slump in industry and services. The MSPs for a few crops have moved upwards. The combination will boost farmers’ incomes and purchasing power, and power demand in other sectors
Retail Inflation 7.61%
Food inflation crossed 11 per cent in October. Prices of vegetables, pulses, eggs, meat and fish rose by 18-22 per cent. But they may drop during the winter season, and allow RBI to keep the liquidity tap open. Global inflation to remain low
Debjoy@outlookindia.com, yagnesh@outlookindia.com