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Cut losses in sectors that could lose relevance in post-COVID-19 world: Axis Securities

Equity investors have to be always prepared for a volatile ride, given the nature of the investment vehicle they have chosen.

May 14, 2020 / 12:01 PM IST

If the businesses invested are not relevant in the post-COVID-19 world, the investor can take a call to exit the investments and look at new opportunities which would have gained prominence at the expense of the businesses which have lost relevance, Pankaj Bobade, Head – Fundamental Research, Axis Securities, said in an interview with Moneycontrol’s Kshitij Anand.

edited excerpt:

Q) We are just 2 months in the bear market, and expecting a bottom (at 7500) in place might be too optimistic. What are your views – do you think we could be looking at another leg of downswing before we stabilise?

A) The market has not yet factored in the current slowdown faced by the economy. The short-term earnings de-growth is more or less factored in by the markets but prolonged recovery or further correction in earnings would cause risk aversion in equity markets.

Domestic equity markets are moving in the direction of the US markets which too are oblivious of the pain in their economy due to the unprecedented intervention by the US Fed.

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We do expect that the markets would wake up from the slumber and taste coffee as the economic inactivity gets reflected in the numbers posted by the India Inc.

Secondly, for the bottom to be formed, it needs to be tested at least once. Hence, there is a high probability of markets correcting to test the last formed low.

It depends on the conditions whether the last formed low is respected and the markets bounce back or correct further forming a new low.

Q) Do you think the investment climate would change post-COVID-19, investors would become more cautious about investing in equities (we saw that post 2008 crisis), etc.?

A) Equity investors have to be always prepared for a volatile ride, given the nature of the investment vehicle they have chosen. The business environment is expected to witness a sea of change as economies exit from the lockdown and limp to normalcy.

Caution needs to be practised in principle to ensure adequate returns and safety of principal. Given the dynamic nature of the investment world, the investors should be doubly vigilant to ensure that the investments which they have made have a prosperous future and sufficient growth potential in the post-COVID-19 world.

The investment rationale which was cogent prior to the COVID-19 outbreak needs to be tested again for their worthiness and only if they are rock solid, one should continue with the investment, else it makes sense to exit/ book loss and moves ahead.

Q) If someone plans to construct a portfolio what should be the ideal portfolio allocation and why?

A) A conservative portfolio should have a harmonious distribution of equities, debt, real estate, and gold. An aggressive investor can afford to look at a slight skew towards equities in wake of the correction seen lately with an investment horizon not less than 5 years.

Taking the same into consideration, an aggressive investor should add equities in a staggered manner over the period of next 6-12 months to construct an equity portfolio that would be able to give him the additional returns to take care of the associated risk.

Q) Warren Buffett gave another important lesson to investors – how to cut losses and preserve cash. What are your views on that?

A) As mentioned earlier, an investor should have a relook at the equity portfolio for the relevance of the businesses in the wake of changed circumstances due to the COVID-19 pandemic.

In case need be, it would be prudent to cut losses as Warren Buffet sold the stakes held by him in the airline companies. If the businesses invested are not relevant in the post-COVID-19 world, the investor can take a call to exit the investments and look at new opportunities that would have gained prominence at the expense of the businesses which have lost relevance.

This move would not only help the investor cut losses but also ensure that the new investments would help him recoup his losses and earn returns over and above the losses.

Q) Warren Buffett is sitting on piles of cash and he is not investing at a time when markets across the globe are witnessing selling pressure. Does it suggest that there is more downside and investors should ideally have more cash in hand? Your views?

A) No investor ever had been able to catch the bottom or sell at the top. Hence, it would be prudent for the investor to identify the stock to be invested, study it thoroughly, and invest in a staggered manner to ensure the low cost of acquisition.

Given the state of uncertainty associated with the markets, one can spread the investments over a 6-12 month period with an investment horizon of not less than 5 years so that the adequate risk-adjusted returns are earned.

Q) Historically, markets have usually rebounded the most in 3-6 months post sharp corrections. Barring the Tech meltdown in 2000, markets have delivered positive returns in the subsequent 12-month period.

On average, it takes about 156 days between peak to trough – the lowest has been 35 days in 2006 and the highest 410 days during Nov’10-Dec’11. When do you see Indian markets returning to the bull phase?

A) No two market corrections can be compared on a like-to-like basis. The GFC had originated due to the failures of the banking system. The current crisis is different as it has its origin from a medicinal event that has led to the disruption of economic activity further threatening the banking system.

The probability of markets recovering in the same fashion as the 2008-09 period, is relatively low. Having said that, it needs to be looked at what fiscal and monetary measures are taken by the relevant authorities to ensure economic revival. The recovery in markets depends solely on the efficacy of the steps initiated and the confidence instilled by the market participants in the target market in response to the measures taken.

If the authorities come up with focused measures that happen to give the desired results, the markets would bounce sooner.

The reverse would happen if the measures initiated fail to deliver the desired results and the authorities have to back up with additional rounds of stimulus to ensure economic revival.

At this moment, the markets are pinning their hopes of revival on the measures contemplated by the relevant authorities.

Disclaimer: The views and investment tips expressed by investment experts on Moneycontrol.com are their own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.

Kshitij Anand is the Editor Markets at Moneycontrol.

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