While one month is too short to comment on overall markets trends, we have been asked to comment on the past month, in our capacity as SEBI Registered Investment Advisors.
Market Performance in April
we see that in April 2022, the Nifty50 index has underperformed other broad indices. The small and midcap space showed strength. While Nifty50 fell by 3.2%, Nifty midcap 150 and Nifty midcap 250 corrected by 0.6% and 1.3% respectively. Nifty 100 and Nifty 500 multicap both underperformed these two, at -2.4% and -1.6% respectively because of the significant presence of the Nifty 50 stocks in them. When one extends the time horizon from one month to the last 12 months the pattern is strikingly similar.
This does not mean that one jumps and invests in only small and midcaps. This space has a few thousand stocks though the midcap universe numbers just 150 according to the standard definition. The small-cap area is more crowded, and very small-cap companies are more prone to volatile price changes. There are many established firms in the midcap space that have already run the marathon and are worthy of consideration. Medium and long-term investors must be cautiously hopeful in these times and seek rising firms that are keeping up with inflation and GDP growth. When investing, avoid using leverage and firms with excessive debt levels.
Are Markets Inexpensive Now?
With the recent dips, valuations are entering a more equitable zone. Nobody, we feel, can forecast and catch the bottom. However, now that the Nifty PE has fallen below 20 and is approaching the Covid bottom level of 18.5, investors have a chance to gradually increase their stock exposure. The markets are less costly than it was previously based on these PE levels.
The Nifty PE was over 40 in February 2021, and it has become less expensive as corporate India’s earnings increased. We haven’t noticed any significant slowdown in profits for quality firms, therefore we feel the markets are reaching a more reasonable value.
The noise over inflation and interest rates must not deter us from owning successful enterprises. Nifty is substantially less costly at 16k, with larger earnings than during the covid crisis. Stock-specific choices must be made, and the time horizon must be three to five years.
Implications for Investor
We advise clients to invest in areas that are important to the global economy as well as those that are driving India’s economic growth. Technology, financials, consumer staples, manufacturing, and a few pharmaceutical companies are among them. Long-term plays on India’s consumer and infrastructure development are particularly appealing to us. We also recommend that investors study high-quality stocks with robust balance sheets, aligned promoters, and rising sales and profitability. We adhere to the ROOTS & WINGS philosophy: ROOTS refer to minimal debt, steady ROE/ROCE, promoter integrity, and stamina. Wings refer to revenue, profit, and cash flow growth, as well as the capacity to retain a consistent market share. This investment philosophy does not change simply because the market has corrected by 15%.
Conclusion
We recommend that clients spread out their cash deployment over weeks and months. This also allows them to pump in more in the event of a sharp correction. A staggered timetable that you construct with the help of a SEBI Registered Investment Advisor helps because one can’t forecast the bottom or market levels. To be honest, a long-term investor should ignore the noise and take advantage of any opportunities to bulk up in specific stocks.
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