What we have to remember is that whenever the liquidity starts fading off, the valuation bubble in many sectors can break and can put many portfolios, which are betting on leveraged companies, can come under severe stress.
We see more direct equity investors emerging in the last 3 months as most of them were sitting at home, but we believe the situation can change dramatically in few months and when the tide turns, we would all know who all are swimming naked.
In the near term equity markets are volatile but in the long run, the fundamentals and earnings growth drive the markets. We have turned very cautious in the near to medium term and from a long-term perspective, we are quite constructive on the markets.
It seems that investors are less bothered about the fundamentals and valuations of companies but the focus has shifted to what is happening in US and European markets. The investment argument based on fundamentals has no place in the minds of investors as markets are inching up daily and the party is on.
Indian economy’s way to rescue still has an extensive way to go, as the lockdown got stretched, the pressure on businesses seems to be enormous without any tough support from the Government or RBI, seen yet. Many states, including Maharashtra, have extended lockdown till August’20 end, and hence we are far from going back to the pre-COVID business situation shortly in terms of demand and productivity.
You may have a question that how are we thinking about the markets at this juncture?
At present, the removal of lockdown in many parts of the world is creating positivity in the markets, PMIs from most of the countries are smartly rebounding except for India, and commodity prices also started moving up. Under the Nifty50 Index position, 38% of the weights are in Banks & Financial stocks, which makes Index Investing very challenging.
The quantum of NPAs which will be added to the existing NPAs because of Covid-19 related impact could be to the tune of Rs 6-8 lac crores as per experts or even more. If we look at the price to book valuation adjusted for the NPA impact, the Price to Book Value of the Nifty50 Index is anywhere between 3.2-3.3x trailing multiple. So, the market valuation based on adjusted price to book value is above Jan’2018 valuation. The market can’t ignore this for too long and this is not a comfortable valuation situation and therefore we are ready to take the pain of making less money at this juncture but at the same time would try to protect the downside in NAVs.
However, quick recovery in the economy will result in lower concerns about credit costs and sharper re-rating for the Tier-2 and Tier-3 banks and NBFCs.
Currently, valuation-wise Indian equities look overvalued across sectors, there is less margin of safety, and the potential to earn respectable returns is low in the near term. But it offers a good long-term investment opportunity provided you are willing to take a higher calculated risk and have an investment time horizon of at least 4-5 years.
We were expecting this rally to happen because of the massive quantum of liquidity pumped in by the USA but currently watchful on markets. We see more disadvantages to happen because of 3 major reasons: 50:25:25 Rule Still works?
1) Evaluations have moved up quite a bit, markets are not inexpensive anymore
2) Opportunity of instability increasing in the next 4 months as US Elections are approaching
3) Salaries growth will be dejected significantly in this financial year.
The party is around, a protracted rumor which is seen in cash turnover replication in 3 months from 40k Crores to 87k Crores, retail contribution going up suggestively into direct equity (as most of the employed class residents is sitting at home and venturing into direct equities – Demat & trading account opening trend advises that whenever the market turns from current levels it can be brutal.
We believe Small Cap Index can give the best returns in the next 3-5-years period followed by Mid-Caps and then Large-Cap Indices. From an economic recovery perspective, “Equity” is the best asset class to invest in, provided you have the time and patience on your side. We have less preference for “Fixed Income” as an asset class but to address the low volatility and manage the low beta but high alpha concept we have switched the funds from equity to liquid for around 30 to 50% of the portfolio.
What I have learned over the last 9 years of my investing experience is that, I need to follow asset allocation at all points of time i.e. there is a need to invest in different asset classes and different market segments to diversify the risk and the asset allocation should change according to the market situations too. Investing is a long-term process (5-10 years).
We may get around 10% to 15% correction and that I am not ruling out. So, keep the cash ready with you, park the cash at this point of time in liquid funds per se the new investment as on when fundamentally and technically whenever we get an idea that market is cheap, will start investing in the market as per opportunity.
SWP is another good way to invest in the market as well so that regular flow at every level of the market gets done.
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