Don’t let volatility drive you away, use it to accumulate stocks on dips

The military operation of Russia over Ukraine has rattled global markets, and our markets fell as if there was no tomorrow. After negotiating the uncertainty and jagged nature of a post-COVID economic recovery, global markets now find themselves staring at multiple factors. Crude has risen sharply. March may bring the “lift-off” everyone’s expecting from the Fed. Minutes from its meeting suggest it may even be open to tightening monetary policy more quickly than expected if US inflation doesn’t ease off. However, most of these factors are known to the markets.

Locally, year to date, foreign investors have pulled out over Rs 53,000 crore from equities in India (it’s not even two months yet). It is equally noteworthy that domestic money has tried hard to absorb these flows and domestic institutions have bought approximately Rs 40,750 crore into the markets so far.

If 2020 was about gains in secondary market, 2021 was about a big bang primary market.

Initial public offerings (IPO) were the flavour of the season, valuations were generally stratospheric and there was a virtual stampede for subscriptions. Paytm listing and a sour run for some giant IPOs may have been the disastrous beginning of the end for overvalued IPOs. Even the great performing companies in the broader markets and indices were not spared this time around as foreign investors went on a selling spree. The profits were the highest here and hence large cuts.

On the positive side, earnings cycle is on an upward trajectory. The market is a slave of earnings. Indian earnings season for Q3 panned out well with most of the managements guiding towards improving demand and reducing supply-side constraints. Commodity, crude prices have risen and have had an impact on margins but most of these companies have taken price hikes. The IT companies, despite most of them coming up with a good set of numbers, as well as, guidance went through a deep round of correction. The same happened to some of the companies in other growth-oriented sectors like pathological laboratories, agro and specialty chemicals, automation and capital goods. The takeaway from most banks was an imminent pick up in credit growth, NPA issues getting sorted and commentaries regarding pick up in loans, demand and capex.

It seems that markets would find stability around the levels of 16,000-15,500. These are not technical support levels that I am referring to but more in terms of valuation support levels. If we look at the consensus EPS of ~1000 for Nifty for FY24, we can probably estimate Nifty to be in a PE band of 15 to 20 depending upon the strength of the economy, earnings cycle, sentiment and liquidity. However, that doesn’t mean that these levels are sacrosanct in the short term. Markets can create excesses on both sides as we have seen over multiple cycles.

Now on the Indian macros, we never had it so good on almost all fronts. I can go on and on but will restrict myself to key numbers like the foreign exchange reserves at $630 billion, direct and GST tax collections trending upwards, rising IT exports etc.

Currency has been rock steady through the turbulences. Political stability, reforms, spend on infrastructure announced in the Union Budget, private sector in capex mode, financialisation of savings, formalization of the economy are positives to dwell on while volatility takes centre stage.

India with its robust growth prospects will receive its share of flows from the foreign investors whenever fresh allocations are made.

It is highly likely that in an environment of higher commodity prices, higher inflation, a move towards higher interest rates, market leaders across the large, midcap space, who have great corporate governance, visible branding, high ROE & ROCEs, pricing power, oligopolistic characteristics, high market share, low or no debt will continue to do well. One has to buy or accumulate quality businesses on dips.

While wealth creation is the ultimate goal, wealth preservation is equally important in the interim. The portfolio has to be balanced on both fronts, viz India’s strengths (Consumption, IT, Healthcare, agro, specialty chemicals) along with the proxies of economic recovery (Building materials, retail, corporate lenders, select NBFCs, capital goods).

Buying in tranches will ensure that one takes advantage of volatility rather than running away from it. It is also imperative to realign and restructure portfolios in an endeavour to cut on junk businesses and unpleasant memories. The idea is to generate long-term stress adjusted returns with a goodnight’s sleep.

Those who try to skip the bad years miss out on good years as well. Being in the game is most important.

(The author is Head – Equity Advisory, Centrum Wealth.)