Our market right now is highly attractive based on most of the valuation parameters. But we must remember that the risk premium will not reduce in a hurry particularly till the market is not able to get clarity on the economic and earnings damage due to the recent events. So caution is necessary, Shailendra Kumar, CIO at Narnolia Financial Advisors said in an interview with Moneycontrol's Sunil Shankar Matkar.
Edited excerpt:
Q: The market hit a lower circuit for the first time since 2008's financial crisis, though later it recovered quite sharply. What are your thoughts?
We are witnessing a classic black swan, low probability event but very high impact once the event happens. In terms of geographical spread, COVID-19 cases have already been reported from 156 countries out of a total of 195 countries in the world. So the fear is widespread and the immediate outcome is negative sentiment in the financial market across asset class across geographies.
In terms of price damage and rising volatility, it surely is comparable to the events in 2008 though the underlying reasons are very different. Also unlike 2008 where initial fall was slow and gradual and the volatility index VIX has not spiked much, current fall in the markets is more comparable to the second half of the fall in 2008 when price damage was severe and VIX had spiked very sharply.
The US VIX in the first quarter of calendar 2008 averaged around 25; it was the last quarter of the calendar where US S&P 500 VIX had traded above the levels of 50 and the price damage was severe. And right now we are already witnessing above 50 levels in VIX and sharp price erosion.
Going forward for the next 3-4 months, the market would be dependent on data points related to this pandemic. Till, we do not see the peak in the active cases, where recoveries become higher than fresh reported cases, things will remain uncertain.
The only positive right now is that China has crossed its peak. The number of active cases in China has already fallen from the highs of 57-58 thousand to the current 10-11 thousand active cases.
Q: The virus-led global rout completely reflected in Indian equities, which clearly indicated that we are in a bear market territory. Is it right time to catch the falling knife with confidence in those businesses where you find value now, as history suggests there is a huge wealth creation after every rout?
Black swan events by definition are Unknown and unknowable variables for the markets. Once we get over the fear of this human tragedy we would be able to gauge the extent of economic damage that has happened or will happen due to this global event. Consumer discretionary spending and trade has been severely impacted. What has added further economic uncertainties is the sharp fall and confusion in the oil market which can trigger plenty of corporate debt defaults and could be the reason for the next wave of selling in the financial market.
At the same time, we should remain confident that as always such events and market rout creates situations of extreme value and invariable it results in huge wealth creation opportunities. The market on most of the valuation parameters like the market cap to GDP, PE and earnings yields have become extremely attractive. The Nifty's earnings yield, minus the 10-year bond yield, is now near levels which have coincided with historical Nifty bottoms. The 12-year average for the Nifty earnings yield minus the bond yield is 1.2 ppt and presently the Nifty’s earnings yield is only 0.2 ppt above the 10-year bond yield which suggests a rising attractiveness of equities. Indian broader as represented by Nifty Midcap and Nifty Smallcap Index is already in a bear market since January 2018. Historically, a bad macro event culminates into bottoming out of the markets that were already reeling under a prolonged bear onslaught.
Q: What is your suggestion to your clients now - stay aside with cash or invest in staggered manner or sell every rally?
We are asking our clients to remain engaged with the market. Such disruptions in businesses and trade result in stocks falling to levels from where large wealth creation starts. The time is to look at existing portfolios and sell those stocks that will have prolonged business stress on every intermittent rally and at the same time add into stocks that have a strong business model to not only survive but grow once the business gets into a normal mode. For those who have yet not invested in the market, this is once in a decade kind of opportunity to deploy investment into equities. Investing in a temporary sub-par business environment rewards the investors with much higher than a normal stock market return.
Q: Equity mutual funds saw more than Rs 10,000 crore of inflow in February which was higher than previous months, and also SIPs flow remained consistent around Rs 8,000 crore levels. Do you think the same trend will continue in coming months or there will be large redemption in MF?
I do not see large redemption. Other asset classes such as real estate, gold or even fixed incomes are not showing any better attractiveness that people will switch the asset class. Also, large investors have already redeemed out during the bear market of 2018-19. So, the flows right now are mostly from retail investors. More so, this money is coming through SIP route that becomes even more attractive in a declining market. We should also remember that the financialization of savings has just started in India and has huge headroom.
Q: Every experts say several stocks are at attractive valuations. Where do you see the value in this market, and after stocks hitting multi-year lows, how investors can decide what to buy or what is better to play?
Our market right now is highly attractive based on most of the valuation parameters. But we must remember that the risk premium will not reduce in a hurry particularly till the market is not able to get clarity on the economic and earnings damage due to the recent events. So caution is necessary. Also for some businesses, the damage may be both high and prolonged, so the investor needs to decide on a specific company basis. Some companies may have very high operating overheads and any decline in revenue will result in large profit de-growth.
Also for companies where the balance sheet is not rightly funded will get into prolonged stress. Even more importantly for some companies, management strength may not be strong enough to handle such large disruptions. So one should be very careful in deciding what to buy, valuation is just one of the variables. On an overall basis, we prefer financials and consumer discretionary stocks. Though one should deploy money in a gradual manner over the next 3-4 months particularly to consumer discretionary stocks like organized retail as good companies also will see one or two bad quarters.
Disclaimer: 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.
Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
Find the best of Al News in one place, specially curated for you every weekend.
Stay on top of the latest tech trends and biggest startup news.
