Market Outlook: Cherry-pick quality stocks in resilient sectors

With the recent announcement of the cement biggie entering the paints segment, a transport logistics major planning to capture the cement market, it seems that not only the smaller players but the well established market leaders are also being challenged. Consequently, considering the fact that many investors invest in the market leaders, there is increasing nervousness among them of whether or not they should remain invested in such companies.

To answer this, firstly it is important to recognize that there is one common trait across all market leaders and that is the possession of economic moats which can help them sustain their leadership and expand it as well. Warren Buffett has repeatedly advocated that the most important factor to pick a successful investment is judging the durability of a company’s competitive advantage or what is popularly called the “moat”.

This is important because companies with economic moat(s) sustainable for the long term are better able to castle the storm and also more likely to handsomely reward shareholders.

So essentially, at this stage it becomes imperative to judge whether or not the market leaders that one holds from a long term perspective have economic moats that are sustainable or are narrowing day by day. Secondly, history also suggests that, while there are classic cases of successful disruptions, many large companies have also failed to penetrate into new segments. So currently while we are witnessing disruptions in spaces which were presumed to have high entry barriers, the market leaders will need to continuously innovate and strengthen their moats to stay relevant. The focus will now shift from ‘expansion of market share’ to ‘protection of market share’.

On the other hand with so many fishes in the pond, it seems that the smaller players will have to drive the wave of consolidation, else they may be the first ones to get weeded out.

Essentially it all boils down to the classic Charles Darwin’s quote “the survival of the fittest”. Irrespective of the environment, the formula for a winning business does not change. It is at times like these where the “moat” of the companies is truly tested. So while it will take a long time to actually know who wins the race, investors should carefully keep tracking how market leaders fare in times of disruptions as this will enable them to evaluate their investment decisions.

Technical Outlook

Nifty 50 index closed on a positive note for the week, confirming that a short term minor bottom is in place now. In line with global benchmark indices, Nifty is also heading for an immediate resistance breakout indicating that the short term trend is bullish. Having said this, there is no concrete evidence that the correction phase has ended. Considering this, we suggest traders maintain a mildly bullish outlook going ahead and follow a stock specific buy-on-dips approach. The next immediate resistance level for Nifty is now placed at 17,400.

Agencies

Expectations of the week

The upcoming action-packed week is filled with a host of events on the cards. To start with, all eyes will be on RBI’s MPC meeting as market participants will try to decode what’s in store for the economy. Given the central bank’s rate-hiking spree to quell the red hot inflation in India, Street is pencilling in a 35-50 bps repo rate hike this time. Also, inflation statistics for China and the United States are anticipated next week, which might trigger jitters in the global market. Investors are advised to cherry-pick quality stocks in resilient sectors and invest in a staggered manner. Nifty 50 closed the week at 16,584.30, up by 1.42%.