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Which stocks and sectors to invest in May 2022

One month is too short to comment on overall market trends and one must not conclude one way or the other based on short term data. Having said that, we see that in April 2022, 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 at 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 for rising firms that are keeping up with inflation and GDP growth. When investing, avoid using leverage and firms with excessive debt levels.

Has the market bottomed out? Is this the best time to invest?

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 market is 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 the corporate India’s earnings increased. We haven’t noticed any significant slowdown in profits for quality firms, therefore we feel the market is 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.

What are the best stocks to invest during correction?

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 refers 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%.

We recommend that clients spread out their cash deployment over the following few weeks. This also allows them to pump in more in the event of a sharp correction. A staggered timetable helps because we 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.