Sachin Shah fund manager at Emkay Investment Managers
Equity markets have been on the roller coaster since the beginning of 2020. Initially, most markets (domestic and international) were close to all-time highs (about 15 percent -20 percent behind the strong CY19).
Over the next two months, unprecedented lockdowns in the economies cut markets by almost 30 percent by the end of March. Markets have rallied nearly 30 percent since then and are now trading at less than the 10 percent we saw at the start of the CY20.
Few investors have been baffled by the recent recovery after noticing a massive disconnection with the ground reality and equity markets. As they say, the devil is in the details, although the markets bounce very fast, there has been a significant change in the sector trends, pre-COVID, and post-COVID environment.
To begin with, contrary to common sense and expectations, smallcap stocks outperformed large and midcap stocks. As seen from the table below, the BSE Smallcap Index in the CY20 is down less than 5 percent, while the Largecap and Midcap Indices are down nearly 9 percent -10 percent.
In CY18 and CY19, smallcap stocks became significantly obsolete and lost their value (down nearly 30 percent), and the values of excellent quality smallcap stocks traded below or near the replacement values of the business franchises they had built for decades. In that sense, the bounce in smallcap stocks is over, which we strongly believe from the last quarter of CY2019.
Among the sectoral trends, there is also considerable variation. Sectors such as banking, consumer durables, and realty trending in the pre-COVID environment are the biggest laggards in the post-COVID environment.
The winners are Pharma, IT, Telecom and Life Insurance, and Margin FMCG. Most importantly, profits in the pharma (36 percent) and IT (up to 18 percent) sectors were very disproportionate and lost. Compared to some large sectors such as banking (down 33%), capital goods (down 25%), metals (down 25%), energy (down 20%) and realty (down 30%).
There are two key ways out of the above trends, first is portfolio positioning and second is the economic outlook:
1. On portfolio positioning, it is widely believed that it is prudent to have a buying and holding approach. To long-term investments and to have very little church portfolio activity.
This is a very truth-compounding game as Einstein mentions the eighth wonder of the fun world. Of equity investing and for that to happen. It is essential to have a buying and holding strategy.
However, there will be some events, which at times will call for a big change in the basic trends. From that point of view, it will be very necessary to be active in the reposition establishment and reconstruction of portfolios. Aligning them to the new environment.
For our maintained portfolios over the past four months. We have more active than we have been over the past few years. Have made changes in our allocations to align our portfolios with the new environment driven by COVID-19. Significantly overweight in the pharma sector (15% -20% + allocation). This has helped our portfolios in the current difficult environment.
2. It is generally understood that capital markets are important indicators of forwarding economic activity. Current market trends indicate low domestic major economic activity, GDP decline, and weak recovery. While defense and export businesses should be relatively better.
There seems to be a significant change in consumer behavior. A change in economic activity over the next few quarters. Therefore, in our managed portfolios, we have added stocks from sectors such as telecom, life insurance, pharma, and technology. We believe that each of these sectors will be better off in the post-COVID-19 scenario.
It should not be forgotten that the rally in Indian equity markets is synchronized with the rally in global equity markets. Global Liquidity & Asset Allocations move very smoothly and rapidly across asset classes.