Long-term investors can allocate 5% of investible capital every week: Sahil Kapoor

Long-term investors should start nibbling at our suggested names, allocating 5% of their investible capital every week throughout the correction, Sahil Kapoor, Chief Market Strategist, research, Edelweiss Wealth Management, said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

Q) What’s your current market view?

A) The market is fairly valued, probably for the first time in years. The trailing 12 months (TTM) price-to-earnings for the Nifty is now below 17.5 times FY20E EPS of INR 530 and at nearly 15x FY21E earnings of INR 610 (consensus: INR 650).

This means the sticky P/E has been washed away in probably the fastest decline in valuations from near 25x TTM to sub-17.5x.

Judging the economic impact of the shutdown and its effects on stock prices is a tricky question. Therefore, our view is clear:

a) Long-term investors should start nibbling at our suggested names, allocating 5% of their investible capital every week throughout the correction.

b) Traders should focus solely on calls coming from our trading desk. We had suggested a number of shorting strategies as well as hedges earlier. We continue to provide strategies on a real-time basis.

Q) What does history suggest?

A) The Nifty has corrected over 30 percent only once since the 2008 global financial crisis. This was in 2011-12 and took over a year to pan out.

In 2008, the market fell nearly 60 percent over 8 months and traded in a tight range for another 6 months, creating a ‘U’ shaped recovery. The current correction has been the fastest and probably one of the steepest on record.

In earlier corrections, the mid- and small-cap indices had fallen more than large caps. But, this time around, the correction in both mid and large caps has been nearly equal from their most recent highs reached few weeks ago.

Indices across market capitalisations (m-cap) have fallen between 33 percent and 37 percent. This means leverage in the system is low.

Two years of bad market conditions had left very little by way of froth. Poor economic growth has kept broader markets depressed even before the current sell-off took place.

Volatility continues to remain extremely high. CBOE VIX and India VIX, a gauge of fear in the market, are currently near record closing levels of 82.5 and 62.5, respectively.

a)   Investors are at a junction where they can begin making valuation calls and start buying.

b)  Timing this market through F&O, hoping for a bottom is futile. Trading probably makes sense through sound professional advice from our desk, but with low leverage and strict risk assessment and management.

Q) Is this correction a recap of 2008?

A) Both, Yes and No.

1.   Yes -- Mid- and smallcap stocks have corrected over 50 percent like in 2008. They had a blue sky rally in 2017 and faced a perfect storm in 2018.

2020 troubles made this segment unwanted, with the price damage reminiscent of 2008. Revival in these segments may take time and is dependent on an economic recovery.

2.   No -- From where we stand, there are marked differences between 2008 and now.

a. There is no lofty bull run preceding the current crash.

b. Leverage in the system is low. Anecdotal evidence suggest that even when the Nifty touched its lower circuit filter on March 12, margin calls were manageable.

c. This has already turned out to be a 2008 kind of fall for a large part of the market. The rest of it may not turn out to be as brutal.

Q) How much of an impact will coronavirus have on economic growth?

A) The global economy has been in a partial shutdown phase this week, with countries opting for anything between restaurant closures to complete lockdowns.

Border restrictions have been imposed. Clearly, this will take a toll on economic growth, with estimates changing every day.

With the impact on growth hovering between 50bps and 150bps, global growth in 2020 is pegged between 1.6 percent and 2.5 percent from ~2.9 percent in 2019. International trade is expected to fall ~20 percent in January-March.

Travel and tourism clearly seem to be the worst affected sector with revenue expected to drop by at least 50 percent over the next six weeks.

However, things are turning fast. Even in the worst-hit Italy, which has the oldest population in Europe, the number of new cases on a daily basis has plateaued at 3,200, down from 3,500 two days earlier.

Globally, the number of serious and critical cases have reduced to ~6,000 from its mid-February peak of ~12,000. Recent reports suggest that China has shut down its last coronavirus hospital as the number of infected patients fell.

Discoveries has been made on potential vaccinations and medications are undergoing clinical tests. The key would be how long the shutdown persists. The longer it stretches, the higher would be the impact on growth.

The impact of season changes, new drug usage and discoveries and success of shutdowns in containing the outbreak will be key monitorables.

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