Markets and Index Performance
The indices are indeed slipping over the last few weeks. Traders and investors appear to be worried about uncertainty related to inflation globally as well as in India. The Ukraine war is not showing any signs of ending. There seems to be some escalation with Sweden and Finland rumoured to join NAtO which is only adding to the confusion. On the domestic front, the interest rate hikes are also weighing on the street, along with the slide of the rupee vis-a-vis the dollar. There is also some unfortunate news about moral hazard in a couple of leading fund houses which has dampened some of the sentiment.
The small and midcap space comprises several hundred stocks of which the midcap universe is only 150 in number going by the standard definition. These have a market cap of half to a billion dollars each. The small cap space is more numerous and clearly one must avoid very small companies which are prone to volatile stock price movements, not always for valid reasons. Within the midcap space there are many proven companies that have already run the marathon and one must go with quality companies. In times like this the long term investors must be cautiously optimistic and look for growing companies that are keeping pace with inflation and GDP growth. One must avoid leverage while investing and also those companies which have high debt levels.
In the past, we have seen INR dipping against the USD and then stabilising. With interest rates set to rise further in the US, there is a case for further depreciation of the INR, but we do not foresee a steep fall. The Indian economy is faring relatively well compared to other large economies, and it will eventually see inflow of capital, as valuations turn attractive. However, INR may not reclaim earlier levels of, say 75 to 1 USD. FIIs will eventually come back once the currency stabilises, as they have to look at dollar denominated returns.
Market Levels and Market PE
We cannot say when the market will bounce back. We believe that nobody can predict and catch the bottom. However we feel that the Nifty PE, having slipped below 20 and now getting very close to the Covid bottom level of 18.5 is giving an opportunity for long term investors to cautiously increase equity exposure. The noise about inflation, interest rates must not disturb the long term investor who is focused on owning strong businesses.
Going by the PE levels mentioned above, the market is less expensive than it was earlier. Nifty PE was 40+ during February 2021 and improved with the growth in corporate India’s earnings. We are not seeing any major slowdown in earnings for quality companies and hence believe that the market is approaching a fairer valuation. Nifty at 16k with higher earnings than during the covid crash, is not relatively expensive. One must be stock specific in their picks and have a 5 year horizon to create wealth by investing at these levels.
The LIC IPO
We have been cautious about all IPOs in the past and advised clients to avoid glamorous and even the not so glamorous ones. With respect to LIC, while it is a market leader, we are concerned about their steady reduction in market share. Since markets always look forward, the Price to Embedded Value ratio is also at a ‘discount’ compared to the large private life insurers. This may not be an anomaly that will get addressed soon. To use a software parlance, it is a feature and not a bug; bugs can be fixed relatively quickly. We are also cautious having seen the experience of GIC Reinsurance and other large PSUs over the long term.
To know more about our advisor’s view on LIC IPO click here.
How to select stocks during correction
We have framed our rules of investing as the ‘Roots and Wings’ investment philosophy, which essentially focuses on companies with strong balance sheets, aligned promoters and growing sales & earnings. By Roots, we mean low debt, consistent ROE/ROCE, promoter integrity and stamina. By Wings, we mean growth in sales / profit / cash flows and ability to maintain a steady market share. These rules do not change just because market levels have dipped by 15%.
As equity advisors, we advise clients to invest in sectors that are crucial for the global economy as well as those that are powering India’s economic growth. These include Technology, Financials, Consumer staples, Manufacturing and select Pharma stocks. We especially like long term plays on India’s consumption and infrastructure growth.
We are advising clients to deploy cash in a staggered manner over the next several weeks. This also gives them the ability to pump in more, should a sharp correction ensue. Because we cannot predict the bottom or the market levels, a staggered schedule helps. Frankly, a long term investor need not worry too much about the noise and take advantage of any opportunities to bulk up in select counters.