Patience is the best counter to volatility

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by Vinit Sambre

Head of Equities, DSP BlackRock Investment Managers

Data shows that it is practically impossible to time market peaks and troughs to perfection. While the market is highly volatile and macro concerns abound, we still believe there are certain pockets of the market which are still worth buying, probably with a slightly longer investment horizon. Besides, we focus on company fundamentals, and we are optimistic of earnings growth led by demand recovery. Oil prices, falling rupee, geopolitics, elections, trade wars and other macro factors will continue to keep our markets and world markets relatively volatile – but this is not something new, and has been the case for decades. If the investment horizon of the investor is long (7-10 years and more), then there are tremendous returns to be made. A country like India with excellent demographics, lofty aspirations and growth potential is likely to have businesses (and thereby equities) participate in this upswing for a long time to come. The key risk in our view therefore is not being adequately invested in the market.

The mid and small cap space has indeed seen some steep corrections, over 20-30% fall in some cases since their respective peaks earlier this year. While there are certainly some stocks which are looking reasonable (not necessarily attractive just yet), overall we believe there can still be some volatility in the coming months. Timing the bottom would be difficult, and would differ from stock to stock, and hence we encourage investors to use the Systematic Investment Plan (SIP) and Systematic Transfer Plan (STP) modes of investing into small and midcap funds. We subscribe to this view and have re-opened the DSP Small Cap fund since 3rd Sep 2018 and are accepting only SIP and STP investments.

The earnings cycle may be picking up, but at the same time, broad valuations continue to be high. While some small caps have seen correction, lot of quality small caps remain expensive. They are still trading at a premium (on price to book (P/B) basis) to the large caps, and we expect mean reversion at some point as these valuations may not sustain for long. In fact, if you look at long term averages, generally the valuations of small and mid-caps have always been lower than that of large caps.

So in this past year we have re-oriented the portfolio by taking advantage of large price corrections and adding some of these small cap stocks to the portfolio. We have increased our exposure to high conviction names which are already a part of the portfolio and which have seen a significant price correction.

One of the best lessons the market teaches us is the virtue of patience – because while short term price movements can be erratic, over the long term, stock prices tend to mirror company fundamentals and result in wealth creation.  Management quality is a very important parameter for us while evaluating companies. We look at competency, past track record of execution, integrity in running the business without resorting to quick fixes, prudent capital allocation, good communication with the investor community among other things.

We are bullish on Financials (especially private banks which continue to take share away from PSU lenders, and corporate banks which we feel has seen the worst of the corporate stressed assets saga behind them), Consumer Discretionary (durables, white goods, autos), Materials (cement, paints, metals etc.) and Industrials (roads, defense). We have cut our underweights in IT (given the INR depreciation and improving management commentaries), are underweight Staples (high valuations), are participating in Pharma on a stock specific basis and prefer to avoid Telecom due to lack of pricing power.

Assuming the overall asset allocation of an investor permits an equity exposure, this equity portion can be invested through SIPs and/or STPs – rather than lump sum. India’s GDP is ~US$ 2.5 trillion. India’s equity market cap to GDP on average has been ~80%. Experts and economists expect India’s GDP to double in the next 5-7 years, and if the market-cap to GDP remains more or less in range, one could logically extrapolate this and expect the equity market cap to double as well. Hence even new investors to the market could create substantial wealth provided they stay invested for long periods of time, despite any interim volatility.

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