Ranked second in the world, with a caseload of over 25 million — of which close to 3.4 million cases are active — and a daily death rate that is alarming, Asia’s third largest economy, India, has been the nation worst affected by the Covid-19 pandemic due to some serious blunders. Having said that, The grave reality is not reflected in the equity markets though, which are again staring at the all-time highs it had reached in February.
The answer to the conundrum is that the virus is no longer an unknown shock to our country or corporates. This means those who are foreseeing a 40 per cent or more correction like last year might be missing the bus completely. Most of the large- and mid- cap companies with sustainable or unique business models, growing revenues, no or little debt and healthy financials, have posted solid fourth quarter numbers. Performing sectors like IT, pharma and chemicals have spawned a lot of budding small- and mid- cap companies that gave multiple times returns.Metals have taken investors by surprise as well. Increased participation in the market, which has seen volumes rise by 1.5-2 times in the last year, has added a lot of liquidity and interest, due to lack of alternative sources of income.
The priority for any investor is to stay invested in good companies and to follow the golden rule — diversify. The index can move sideways, up or down, it can frustrate you, take you by surprise and leave you shocked, but investing in good companies will surely increase your chances to mint money.
Let us break this down step by step.
What options does an investor have?
Equity, debt, commodities and real estate are some of the options. The Nifty50 and Sensex have consistently given 13-15 per cent compound annual growth rate (CAGR) returns in the last decade, beating inflation and generating real returns for the investor. It is less volatile and relatively easier than picking commodities without understanding the global game demand and supply. Hence, as per the risk appetite of an investor, we suggest the following:
In the light of Covid-19 uncertainties, it is advisable to hold cash to cover 3-6 times the monthly expenses, for personal/family exigencies.
When investing in equities, you must remember a few points.
1. Don’t panic
A year ago, Nifty was around 9,000. The current levels of the potential returns markets can give in the darkest of times (around 64 per cent on one year rolling basis). There is also a widespread evergreen fear of market corrections. However, markets recover much quicker and in larger volumes than anyone can anticipate. It is important to stay partially or completely invested to gain from such rallies. And yes, timing the markets is a fool’s game.
2. Markets are healthy
Across the globe, nations and their central banks have unleashed massive liquidity through easy monetary policies and quantitative easing. These policies have been a shot in the arm for global equity markets, and are likely to continue for a long time, particularly after the Fed indicated it won’t raise interest rates before 2023. Fiscal stimulus by other developed and emerging economies that are close to 10-15per cent of their respective GDPs have ensured survival of numerous businesses. Global availability of cheap funds made borrowing convenient, supporting businesses.
3. Markets are resilient
Foreign institutional investors (FIIs) and domestic institutional investors (DIIs) are crucial in giving direction to share markets. A record FII flow of over Rs 2.5 lakh crore in the last financial year has enabled markets to generate 78 per cent and 75 per cent returns in Nifty and Sensex respectively, whereas, on a one year rolling basis (excepting the months of April and May 2021) FIIs have taken out over Rs 20,000 crore. Overall, we’ve seen a massive interest in the Indian markets. What is interesting is that in the fourth quarter of financial year 2021, FIIs have raised weights in nearly two-thirds of the industries, like auto, finance, healthcare, power, retail, capital goods and infrastructure. During the same period, they have raised their stake in 64 per cent of Nifty50 companies, showing confidence in the Indian growth story.
Being one of the fastest growing economies, India has reciprocated with higher returns, making it one of the most interesting and rewarding destinations for investments.
Another interesting fact was that FIIs and DIIs were on opposite sides most of the time, something that tends to prevent markets from crashing big-time — because DIIs seem to have money in hand.
4. Markets are diverse
Investors should have a right mix of large-cap, mid-cap and small-cap stocks in their portfolio, which needs to be continuously monitored, with actions taken to change the mix as per prevailing market dynamics.
A moderate risk-taker should allocate 35-40 per cent of funds in mid- and small- cap companies, and the balance in large-caps, to generate higher returns.
Another important aspect is optimum sectoral split, since taking exposure in growing and outperforming sectors increases the likelihood of higher returns in the markets.
In our opinion, IT, chemicals, top private banks, pharma, domestic capital goods manufacturers and metals will continue to outperform the broader markets.
A portfolio should typically consist of 20-25 companies with high conviction across different market caps and sectors. You can take the help of an expert to build a robust portfolio for you.
5. Find hidden gems over obvious choices
The final, and probably the most important factor determining our investing success, depends upon our choices. With solid and dynamic research, we should endeavour to invest companies with a sustainable business, visible future growth and strong corporate governance. We will encourage you to keep a portion of your equity in firms which have unique and promising business models, or are capturing new opportunities.
The author, a CA and CS, heads portfolio management services at Hem Securities