Let us try and understand what led to this exaggerated behaviour of the markets and, most importantly, what has to be the strategy. FIIs have been sellers since almost the last 7 months. Approximately Rs 2,50,000 crore has been net outflows from equities since October 2021. Withdrawal of excess global liquidity, disruption in supply chains, rising Brent crude oil prices, weak rural demand locally and Ukraine-Russia face-off creating geopolitical uncertainty are some of the reasons for this bout of selling. Additionally, commodity price inflation, inflationary trends in the US and other central banks hiking rates aggressively (or expectation of the same) led to sharp corrections across our market.
Though the Nifty is down barely 7 per cent from its 52-week high, it has seen the correction in some blue chip and frontline stocks which have made headlines. Let’s first understand that ‘What’ has held indices together.
Firstly, strong backdrop of improved corporate earnings. Nifty EPS grew by 15 per cent in FY21 – the first double-digit growth in a decade, earnings are expected to grow by 30 to 35 per cent consensus in FY22 and around 20 per cent in FY23. Also, growing faith and trust of domestic investors via mutual funds and new investors via direct equity route, with consistently higher equity allocations, have helped as a cushion against continuous FII selling. Last but not the least, the government’s intent and ability to drive big reforms be it disinvestment (Air India), LIC IPO, manufacturing (PLI schemes), or supporting those at the bottom-of-pyramid through targeted welfare schemes, has helped.
Now the most pertinent question is though nifty seem resilient, why are some great businesses (Read large or mid, which are compounders and have all superlative qualities like high market share, pricing power, high return ratios, moat, high margin profile, free cash flow generation, superb management, sound corporate governance) correcting more than the markets.
The fact that there is “over ownership” by the exiting party (read FIIs) is one of the crucial factor in this round of stock correction. These are companies which have consistently stood the test of time & delivered handsome CAGR returns over the last 5, 10, 15 years’ history. People tend to book profits where they have profits.
Most importantly, it is sector rotation, which has been the constant feature in the last few months. One look at the composition of stocks which have participated in the rally or rather why Nifty has been able to show resilience will make the picture clearer. The under owned and low valuation stocks which mostly belong to the cyclical commodity universe and power. Oil had the best times in more than a decade and they are making hay while the sun shines. Whether this will prevail for a quarter or two or four is a difficult call to take as predicting the cyclicality of commodities would be a wild guess to make.
Refer to the exhibits below.
Should one change the construct of one’s long-term portfolio if they are invested in great blue chip companies? The answer to this can’t be generalised, it has to be very stock and business specific. But yes, one thing is for sure, in an environment of high commodity prices, higher inflation and higher interest rates, market leaders and emerging market leaders having high market share, oligopolistic characteristics, pricing power, superior growth matrix and high standards of corporate governance should be integral part of the portfolio. However, underperformance of these businesses in the shorter term is a distinct possibility due to factors not under anyone’s control. But most importantly, holding, buying and accumulating great businesses when they go through these bouts of volatility will be an opportunity to be cashed in adversity.
The portfolio has to be balanced on both fronts, viz India’s strengths (IT, Healthcare, agro and specialty chemicals, discretionary consumption) along with the proxies of economic recovery (Building materials, retail and corporate lenders, select NBFCs, capital goods).
Buying in tranches will ensure that one takes advantage of volatility rather than running away from it. Regular review of the constituents of the portfolio to check on the fundamental developments and management commentary should be helpful for long term robustness of the portfolio. But Checking your portfolio daily is like putting up a webcam in the forest to see if trees are growing!
(The author is Head, Equity advisory at Centrum Wealth. Views are his own.)
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