Aruna Giri of TrustLine said unlike 2017, which was a year of magical macro, 2018 will be a year of micro with stock specific sizzle steered by a progressive revival in the so-far elusive earnings growth.
Rewind back to May’2013. One would find a striking similarity to what we witness now – ferocious fall in small and midcaps triggered by vicious fall in currency, sharp rise in the 10-year yield, incessant FII selling, and rising fears on twin deficits (current account deficit and fiscal deficit).
The underlying cause for the mayhem in both May(s) can’t be more similar. Back then, it was taper tantrum i.e. the term used for the unwinding of bond buying program from US Fed (withdrawal from quantitative easing).
What followed was a rout on currencies across emerging markets. This even prompted Morgan Stanley to coin an infamous term “Fragile Five” to highlight the currency stress on much of the emerging markets, including India.
Back home, small and midcaps were slaughtered mercilessly on fears of a continued run on the Rupee. As we know now, much of those fears faded as quickly as it came.
Fast forward to now, it is the expected acceleration in Fed rate hikes coupled with some unexpected jitters from crude that have caused the slump in small and midcaps.
Fear of political risk in terms of the possibility of an unstable government formation in 2019 couldn’t have come at a worse time for Indian markets.
But, the interesting aspect of 2013 was, within few months, that is, well into taper tantrum, markets recovered with Rupee recouping much of its losses on return of FII buying.
It was not so much of “taper” (unwinding) that caused the trouble, but the sheer prospect of such “taper” coming did more damage.
In hindsight, going by the sharp rebound in the markets in six to eight months, taper tantrum was a terrific opportunity for anyone who cared to ignore the macro noise and focused on stock picking and portfolio building.
Needless to say, current US Fed induced fear, and it comes as a fantastic opportunity for seasoned stock pickers who have the wisdom not to time the bottom and have the stomach and nerve to digest the notional mark-to-market losses in the interim.
Of course, no one knows what is in store for 2019 when it comes to political risk. Given this, it is very tempting to hold back buying and wait for the event risk to clear.
But, as any seasoned investor would know, it is the prospect of a risk than the risk itself that does the price damage. Moreover, if past is any guidance, politics at best can wreck few weeks of volatility, not anything more.
It is the earnings and economic growth that will dictate the medium to long-term market trend, not the politics, as the past cycles suggest.
But unfortunately, few learn from history. Even those few who learn, most take comfort in the breathless commentary in business channels that focuses on the short-term gyrations than to switch-off from those endless chatter and take the most important action, that is, portfolio building on the ground.
Those exceptional few who brave the volatility to build a portfolio, needless to say, will reap rich dividends not too far in the future.
More so, with the improving micro on the ground. The macro drift is unlikely to derail the carefully crafted recovery that is underway in the micro (corporate earnings growth).
While macro may be losing some of its mojo, growth in the broader economy is coming back with vengeance, giving a fillip to corporate earnings growth. Early signs of recovery in the investment demand (capex cycle), couldn’t have come at a better time.
“It is time to invest, not to time the bottom. When it is raining gold (in the context of small and midcaps), it is time to reach for the buckets”
Unlike 2017, which was a year of magical macro, 2018 will be a year of micro with stock specific sizzle steered by a progressive revival in the so-far elusive earnings growth.
Investors should continue to focus on stock picking and portfolio construction during the ongoing slump to benefit from the eventual breakout that is likely to happen as the acceleration in the economy gathers steam.Disclaimer: The author is Founder CEO & Fund Manager, TrustLine Holdings Pvt Ltd. The views and investment tips expressed by investment expert on moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.