Hello Reader

 

  The year 2018 has been a roller coaster year ride for most of the investors with market showing a lot of uncertainty and volatility till now due to many factors/ cues  like  Global ones(Trade wars, Crude oil prices, Fed rate potential hikes, dollar valuation) and domestic ones (Inflation, domestic rate hikes, Rupee devaluation , FII/DII flows ,election results scenarios, corporate results etc). While benchmark indexes (Sensex & NIFTY) have grown by 13% and 10%, the broader market has shrunk negatively – Mid caps by 6% and small caps by 16% .   There are many lessons to be learnt from the broader market performance this year . I will give some personal investment lessons and examples to drive home the point.

 

1)Large business bias:- Mid-caps & small caps carnage was waiting to happen. This year small caps and Mid-caps have shrunk by 6%/16% while Sensex has grown by 13%. In last 5 years, Mid-caps had out-performed large caps by 77%(2013 to 2018) and had gone up to a PE premium of more than 70% w.r.t large caps till March 2018 (compared to 5 year average premium of 6%). Even today, they are sitting at a premium of 24%. Mid-caps were sitting at 1 year forward PE of 30 instead of average PE of 20 till March of 2018 when the mid cap carnage happened. Even now Midcaps are sitting at forward PE of 23 . Hence, Invest in large caps or Big midcaps having deep moats/competitive advantages in these times of uncertainty and high valuations.  Don’t invest in smaller mid-caps and small caps at all . For example, prefer India Bulls housing finance and Dewan housing finance instead of Reliance homes and Can Fin homes among Housing finance companies. Prefer Sun Pharma, Dr Reddy and Aurobindo pharma than Caplin Point and Ajanta Pharma among pharma companies. The total exposure to Mid-caps/ small caps shouldn’t be more than 20% at such uncertain and volatile times and exposure in any one mid cap/ small cap stock shouldn’t be more than 4% at such times. My exposure in certain mid-caps/ bigger small caps like Avanti feeds, Ajanta Pharma and Caplin Point and Reliance Home was on the higher side for this year’s investments (10%, 7%, 6% and 6% respectively). Although they were fundamentally strong stocks , they got butchered in the mid cap carnage.

 

2)Quality & consistency bias:- Streets show a zero tolerance towards non-performance in a year of uncertainty and volatility, when valuation is stretched and global/ domestic cues are negative.  Carnage and zero tolerance in case of non-performance is much higher in case of mid-caps/ small caps than large caps.  Invest in top quality companies with superior moats (competitive advantage) among large caps and mid-caps which show superior & consistent earnings growth performance without any disappointments to the street… For example Yes bank , IndusInd bank , India Bulls housing Finance, Bajaj Finance , Dewan housing, Eicher Motors, Titan etc

 

3)Availability of analyst / brokerage reviews: – Invest in well-known names which are reviewed by many analysts (at least 10 or more analysts/ brokerage houses). For example don’t invest in names like Avanti feeds , Caplin point and Reliance homes  which have hardly any analyst/ brokerage coverage. For example, Avanti feeds & Caplin point is covered by 2-3 analysts/brokerages today while Reliance Home is covered by one brokerage house/ analyst. Don’t invest in such companies where we don’t have a good analyst coverage and business analysis data available.

 

4) Strategy among non-favourite sectors :- Invest in Top names among non-favourite sectors in a year of volatility/ uncertainty( For example ,IT and Pharma in 2018) . Invest in Sun pharma, Dr Reddy and Aurobindo pharma instead of caplin pharma and Ajanta pharma in pharma industry or TCS and HCL Tech among IT sector instead of smaller IT companies.

 

 5)Election year bias:- we should understand that in an election year , business economics are different . Elections are generally preceded by a loose fiscal policy followed by general efforts to boost domestic consumption and capital investment. Hence our stock picking and portfolio construction should have a favourable bias towards domestic consumption and infrastructure. The effort should be towards picking up secular growth stories with superior moats which will do well irrespective of election results. Such secular growth stories could be in sectors like Private retail banks, NBFCs, HFCs(Housing Finance companies), domestic & rural consumption (like FMCGs, Auto, consumer durables etc), IT service companies etc .

 

Finally , be vigilant towards picking up great quality and reliable businesses with superior moats/ market cap and consistent earnings growth in an election year which comes with its own volatility and uncertainty and invest with a long-term perspective (3-5 years perspective).

Happy investing

Amar