Long-term equity investors should allocate 30 percent of their portfolio to top private banks and NBFCs and one state-run bank
The sell-off in the global market is due to fears over the coronavirus pandemic and not enough controls being initiated by the rest of the world. Indian equity market will follow its global peers during such situations. Currently, we don’t know when this chaos will come to an end. The situation can be easily remedied by implementing stringent restrictions. This period may last for some hours to days. Investors should be inactive during such time and assessing the situation. This pandemic will be brought under control, so a long-term investor should wait and watch and start accumulating quality stocks systematically.
Many global parameters like bond yields, volatility and prices indicate that this crisis is worse than the 2008 global crisis. But we foresee that both scenarios as very different, with the current scenario not as worse as is being speculated.
But at the same time, we are confused and concerned with regard to the negative movement of US bond yields reversing towards zero. The US government 10-year bond yield has corrected to 0.85 percent from 1.65 percent a month back. This is even below the levels seen during the 2008-09 global financial crisis, which is a point of concern. Is it something to do with some unknown factor? We suspect it to be expectations of quantitative easing and huge interest rate cuts by the US Federal Reserve during CY20.
We expect the situation with regard to the coronavirus pandemic to normalise in the next two-to-three months. The number of new cases in China has been reducing tremendously. Lockdown, quarantine and travel restrictions was the way to achieve it. South Korea, Italy and Iran are experiencing difficulty in controlling the spread of the virus, but it is possible in the future with more controlling measures.
The sudden eruption of oil the crisis, with Saudi Arabia and Russia failing to reach a production sharing deal, too is a cause for concern. But this too is expected to reverse as demand improves and both parties reach an understanding that they are the biggest losers in the current situation. But this situation will continue if their intension is to target new oil producers like US shale gas.
Long-term equity investors should allocate 30 percent of their portfolio to top private banks and NBFCs and one state-run bank. Consumption, chemicals and pharma should constitute the next 25 percent. The balance may be invested in IT stocks and companies with strong management credentials, clean fundamentals, dividend history and healthy business outlook.
Spread your investment over time in these stocks and sectors. Stick with quality stocks having leadership in their respective sectors, products or niche segments. Don’t be lured by low prices like new lows, 52-week low or a bounce in price during such a consolidation period. Capitulation is not an opportunity to buy. Stick with quality, don’t sell, check the stock’s fundamentals and technicals, and undertake a qualitative analysis before investing.
The author is Head of Research at Geojit Financial Services.
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