FII selling is a combination of ETF redemptions, the unwinding of leveraged positions, and algo-trading. But, most of the markets across the world are behaving in the same fashion, says Sundaram of o3 Capital.
Many mutual funds have strong portfolios and a time like this should be utilised to fine-tune the portfolio. Investors should spread their overall portfolio into three or four funds that are reasonably different from each other, EA Sundaram, Executive Director & CIO-Equities-o3 Capital, said in an interview with Moneycontrol’s Kshitij Anand.
Edited excerpts:Q) What will you advise investors who are left with bleeding portfolios even though they invested in mutual funds?
A) Whatever they do, investors should not go out of all equity funds at these prices. The worst thing that can be done now is to sell at these prices.
Many mutual funds have strong portfolios. A time like this should be utilised to fine-tune the portfolio. Investors should: (1) consult your trusted financial adviser to see which portfolios have stronger companies, (2) spread your overall portfolio into three or four funds that are reasonably different from each other, eg one large-cap, one multi-cap/balanced, one mid-cap and so on, and (3) do the same thing with fixed income funds.
Q) Gold, oil and equities all moving in one direction. How should investors read this?
A) This is one of those times when logical arguments lose their relevance. Just as we saw frenzy on the bullish side (companies without any profits trading at exorbitant valuations), now we are seeing a frenzy on the bearish side (excellent companies with strong balance sheets and fundamentals available at decade-low valuations).
The only things that an investor can do are:
a) Have a reasonable level of diversification between fixed income, equity, and other assets. The extent of this depends upon each individual’s needs for liquidity and is to be decided in consultation with a trusted financial adviser.
b) Within the same asset class, we have a mix of different types of funds. A balanced mix of large-cap, multi-cap and midcap products in equity, and a mix of short-term and medium-term debt in fixed income.
c) Have the equivalent of 6 months' monthly income in a liquid/overnight fund.Q) Many investors want to take advantage of the fall in the markets but have no firepower? What is your advice--start a small SIP?
A) A SIP is done irrespective of the level of the market. The advantage of a SIP is realised only if the investor has remained with the SIP at least for one full market cycle, preferably longer.
During such a sharp market fall, the investor (if fully invested) can make use of the opportunity to dispassionately look at the portfolio, and switch to stronger companies/better fund portfolios in consultation with their financial advisers.
The only thing not to be done under such conditions is to panic and get out of equity. This is not the level at which equity should be exited.Q) Foreign institutional investors (FIIs) have been pulling out money from markets. What is troubling FIIs? Is it the margin pressure redemption, ETF selling or just that smart money is moving to safe havens?
A) It is a combination of ETF redemptions, the unwinding of leveraged positions, and algo-trading. Considering that almost all of the world’s markets are behaving alike, any other market can’t be called a “safe haven”.Q) With fears of a recession looming, investors can say goodbye to an earnings recovery for at least two quarters. What is the kind of earnings cut you are factoring in?
A) It is early to say. However, it is quite evident that there will be significant earnings cut for the next two-three quarters. The stock market has adjusted for that.Q) Some analysts say the coronavirus outbreak is nothing like what financial markets have ever faced, so the outcome will not be similar either. Its effects will be far-reaching. Does that mean one should stay away from equities?
A) Yes, the Covid-19 epidemic is indeed nothing like that we have seen before. But over the last two-three decades, we have periodically faced crisis situations of different kinds.
Not all businesses, not all companies are equally affected by a crisis. Some businesses are inherently stronger, with stronger balance sheets and business models.
When a panic attack strikes, the stock prices of such companies also fall sharply. We simply cannot accept the argument that all businesses and all companies would be permanently affected.
The only reason to stay away from equities is when we believe that there is no economic growth for this country. We don’t believe that, so there is no reason to disbelieve the equity market.
Of course, we have to be careful about what we buy and at what prices we buy. Let us all ask ourselves. There are stocks of strong businesses that are now available at 30, 40, or 50% cheaper price compared to just a few months ago.
In all other forms of economic activity, a low price for an asset is considered a strong reason to buy. Why should it be any different for the stock market?Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.