Investment Shastra

January 2020: MoneyWorks4me Outlook

january 2020 moneyworks4me outlook

Review

Nifty Total Return Index (Nifty including dividends) earned ~8.5% in the last 1 year and ~11.6% CAGR in the last 3 years.

Nifty continues to remain steady thanks to a handful of stocks making all-time highs while the rest of the market is at 52-week lows or even 3-year lows.

This narrow rally means that an average investor’s portfolio hasn’t earned good returns from equity this year. A diversified portfolio can’t be built with just 5-10 stocks.

Overall the sentiment remained negative due to no uptick from festive demand. The economy remains sluggish due to credit squeeze, lack of employment growth and no increase in demand.

Outlook

As on date, the average upside of our coverage universe is likely to be less than 9% CAGR over the next 3 years.

Just a handful of companies are delivering moderate earning growth due to slow economic growth.

Some pockets of the market like consumer staples, consumer discretionary and insurance/AMCs are trading at stretched valuation.

These companies are enjoying high valuation as more and more investors are chasing them.

This trend will reverse as other sectors start showing signs of improvement. We recommend to avoid pockets of euphoria and be patient. Do not chase recent performers as it can lead to big disappointment in the future.

We find that Nifty 50 also trades at 12-15% above its fair value as stocks with large weightage in the index are trading at elevated valuation.

Even if the indices valuation doesn’t look cheap, we suggest buying stocks with low valuation and good future prospects.

We are looking at companies that have good earning triggers over the next 2 years as we are not certain whether broad-based recovery will happen immediately.

We are investing in companies i) coming out of sector consolidation, or ii) introducing new products, or iii) commissioning new capacities or iv) executing the order in hand.

An investor can consider investing in value and high dividend yield stocks like Infra & Infra-related companies like capital goodshigh-quality PSUscorporate banks, pharmaceuticals, and select NBFCs.

We are still evaluating ‘Credit Risk funds’ as they might have become cheap, due to herd’s negativity, even after considering the risks they carry.

If we find any merit, we will share our recommendations and analysis with our subscribers.

We are buying small and mid-cap stocks selectively, however, we do not find merit in going overboard in these stocks as they aren’t cheap to provide us good risk-reward.

If one buys broad small/mid-cap mutual fund, even if they rise from here, long term returns won’t be commensurate for the risk one takes investing in small and mid-cap companies today.

SIP product may work in such a small & mid-cap but we recommend caution on lump-sum purchases till we don’t see broad-based earnings recovery in mid and small-cap companies.

Risks

CoronaVirus – Global

As on date, China has reported 44,000 infected cases and 1113 deaths from CoronaVirus. China has shut down the center of the CoronaVirus outbreak, Hubei.

Factories, commerce is shutdown in select large cities. Workers haven’t returned and many business activities are down.

China is one of the largest consumers of many global commodities and services. A slowdown in China can affect the global prices of these commodities and services. This leads to a temporary slowdown across the world. If the disease spreads further, global economic growth may be affected.

As of now, the Chinese government is taking measures to avert large scale crises. The effectiveness of the same needs to be seen.

We are cautious on raw materials prices for Pharma, fall in metal prices, etc.

GDP Slowdown

GDP growth averaged around 4.75% in the first half of FY20. This was the lowest in almost 8 years.

One will also notice that the slowdown is entrenched from large size purchases to small ticket items.

Private investment grew at only 1 percent. Nominal GDP growth fell to a new low of 6.1 percent.

As we know that equity returns have strong co-relation to the nominal GDP growth rate, the equity market has been underperforming.

Usually, slowdown stays for 2-4 quarters after which the low base effect kicks in thereby leading to above-average growth and sentiment improvement. So it is a wait and watches mode to see how it pans out.

We do not see merit in avoiding equity just because near GDP growth is lower. No one can time the pick up in the economy.

Markets may turn the corner before actual GDP growth picks up.

Opportunity for long term investors

Overall markets may remain subdued until the time earnings growth kick in. But this doesn’t mean individual stocks won’t rise.

We expect the below-average return in Nifty over the next 2 years so be light on Index Funds for the next few years.

But expect superior returns from stock picking as average stock today is trading cheaper than Nifty.

Near term uncertainty in structural growth, story spells an opportunity for long term investors. Stocks are beaten down from short term slowdown.

We do not find any merit in second-guessing what’s going to happen in the next 6months-1year. We leave this field open for speculators, fear mongers, and punters.

We are managing only long term money and predicting near term events is futile.

We continue to recommend Gold Fund/Gold (up to 5-10% of the portfolio) as a hedge from potential geopolitical risks and allocation to safe liquid funds/Fixed Deposits (10-20%) within in equity portfolio for capturing new opportunities.

Together these investments will hold the portfolio relatively intact even if the market reports minor declines.

Beyond this, tinkering asset allocation will only reduce long term returns thereby missing one’s target corpus.

Equity returns often give surprises, we wish to stay invested to enjoy such surprises.

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Ketan Gujarathi

Manager - Equity Research; Based in Pune, a Total of 7 years of work experience ranging from equity analysis, credit rating and banking. MBA in Finance and a Bachelor's degree in Engineering. Passionate about studying companies. Likes reading history & business books. Spends free time with friends and family.

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