The market has seen a V-shaped recovery in last three months after an intense drawdown in March 2020. But in spite of the strong pull in the market, the broader market continues to remain nearly 10 percent (Midcap 100) and 15 percent (smallcaps) negative this calendar year.
What is more interesting is - the last 2.5 years the Nifty Midcap 100 is down 27 percent and Small cap Index is down 46 percent, whereas Nifty 50 is up 6 percent.
This is good news for investors who are looking to build on their equity portfolio, but see limited opportunities in largecaps post the recent sharp run-up in stock prices. Undoubtedly, great bargains are available today in small and midcaps, but to make worthwhile returns without exposing yourself to high risk, it is imperative to invest into quality and with businesses in broader markets, which have the following traits:
1. Leadership position: Those companies that can survive through this tough time will benefit from industry consolidation and market share gains. COVID has put businesses to the ultimate test of survival whereby weaker and smaller players may need to shut shop. There will be a strong shift from the unorganized sector to the organized.
2. Strong balance sheet: Companies that will be well placed would be those with relatively low level of debt or even better, high levels of cash, which can be used to fend off competition or to proactively invest and gain market share.
3. Strong brand equity and distribution: Brand equals trust and what can be more important than trust in these uncertain times. Be it in the food we eat, places we order from or the places we might go to in the coming months. The only other thing that we all now know through experience, which is a bigger factor than trust, is logistics/distribution and availability. Companies that have been proactively open for business and have taken the pains to make their products available, have gained disproportionately.
4. Strong management capabilities: Last but not the least, financial and operational success is driven by people. Strong management capability of execution and integrity in intent, are key elements of success.
The time to invest is clearly NOW:
1. Attractive valuations: Nifty correction YTD has been -8.5 percent versus Nifty midcap (-9.8 percent) and Nifty smallcap (-15.6 percent)
2. Poor alternatives for investment: Fixed deposit rates post tax in high quality banks is sub 4.5 percent
3. Inflow of Liquidity expected: FII inflows have steadily increased pace since May, after sharp sell-offs in March 2020.
The author is Fund Manager at Ambit Asset Management.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.