The news flow across the globe is not all too encouraging. Is this a sign of what is yet to come?
This is definitely the first sign of what is yet to come. There may be a bounce back in the market at some point after such a sharp fall but this market is not really falling purely because of the new strain of virus in the UK. The headline seems to suggest nobody is really talking about the fact that we were trading at a price earnings multiple of about 38 which is unheard of! So at some point, this correction had to happen. I have said it before, this market has to fall only 10-15% for it to fall another 20%, sheerly and purely because of panic. Nobody complains when markets are going up. One day it falls 4-5% and there is panic all around and this trend continues the next two-three days and the big fall that I have been talking about will probably happen towards the beginning of next year. I am not surprised at all that markets are falling the way they are. In another 10-15 days, we will start looking at the Q3 earnings and if there is anything short of extraordinary, then this fall could get quite deep from these levels.
Would look for a lucrative buying opportunity as the markets are starting to grind lower?
At this juncture, not much looks good but I have said before that I really like PSUs at this point because PSUs have been beaten down. On Monday, ONGC fell about 8-9% from Rs 100 to about Rs 90 and that is a stock that you could look at buying. There are small banks like Federal Bank and IDFC which one should consider buying if they fall a little more. Those are the stocks that you should be looking to buy but in general, I do not think this is a time to look at stocks and jump on them and start buying.
This is the time to have a diversified portfolio with a heavy allocation towards fixed income because markets are not going to trade above 30-32 kind of price earnings multiple for a long time. Even if there is a bounce back, they go up 4%, 5%, 6%. I have said that I am expecting anything between 30% and 40% correction in overall markets and that could play out anytime in the next one year.
When you talk about long term investing what are the good stocks that you could buy? Make sure that your equity allocation at no point goes above 50% in these markets because if markets fall around 10-15%, that allocation as a overall percentage of your portfolio would come down to about 35% and that is a time when you should take out more money from your cash reserves and top it up into equities. Do not miss out on holding good stocks which are undervalued because so long as this rally is continuing you should keep benefiting, but definitely have a much higher percentage of your portfolio in fixed income.
Given Monday’s correction, where would you see an opportunity to buy?
Same stocks that I have been recommending. I said I am positive on crude prices shooting up, so ONGC is one stock that I recommended. I am still very positive on pharma. I think the coming union budget will have a lot for pharma companies. Banking and financials I have been wary of. I have said it for almost a year now irrespective of the way they have been running up and that is one pocket from where you should withdraw your money and stocks and sectors that have done nothing in the last one year. So, auto for one; oil and gas the other, PSU in general as a theme I really like, look for stocks in these baskets and start slowly buying into them.
Also, hold over 50% of your portfolio in fixed income. Fixed income still makes you around 7-8%. So, why chase superhuman returns in a market where price earnings multiple is at 38! It makes no sense. It is very easy to get carried away when markets keep running up the way they have in the last few months.
In terms of some of the deeper cyclicals that everyone has been focussing on, do you feel that perhaps there is a story there? Or is it safer to stick with the IT and pharma names for now?
Definitely IT and pharma names. The more the bad news comes out, pharma stocks will benefit. Even in March-April, when the market had such a bad correction, pharma stocks did not fall at all. So if you look at the pharma index for the last one year, there is not even a blip in that. Pharma is not just a defensive right now. It is a very growth oriented industry because anything that happens in the world will be positive for pharma, no matter how you look at it.
These stocks have not done much in the last one year or two, three years before that. So, they had already been undervalued. Look at Lupin, Sun Pharma, Aurobindo. They are still far away from their all time highs so that is definitely one pocket where you should stay invested.
IT is the other one because IT will do well if the lockdown continues for a long time. But I am wary of financials, I am wary of NBFCs in particular and that is where you may see very bad fall. If markets were to fall 30%, they will actually outperform the markets by a lot in that fall. So that is definitely something where you should come out of.
The other two sectors which I really like are auto and oil and gas, purely because of valuations and the fact that while the world was shut down, these sectors really suffered and prices are still very soft there and that is where you should be looking to buy. But if there is an overall correction in the markets, then everything goes down. ONGC which is one of my favourite stock picks right now has fallen 8-9% today which has again outperformed the market in that fall.
What is your view in terms of a potential upside let us say in the first half of next year?
I have a fairly negative view going into the next year because I cannot really say how much more this can continue. I am actually pretty positive on the Budget. The government is going to try and do everything to keep things looking well until there is a cure or until there is some positive on the whole Covid front but right now where we are as a fundamental investor it makes absolutely no sense to stay invested in these stocks for a long term buying at these levels.
If you want to play out the market for the short term, keep 20-30% of your money in some of these stocks that I spoke about. Pharma and diagnostic stocks is where you should stay invested because until the union Budget, irrespective of how the markets go. these stocks are either not going to fall much or they can see a sharp upside because every time there is news about an RT PCR test, the Dr Lal Path Lab stock just starts moving up.
Sometimes opportunities have to be looked at from a very short term view. I would not even now recommend that you buy these stocks and hold on to them for a very long term because from these levels, you would be a fool buying stocks at an overall market multiple of 38 and expect to make a lot of money in the next three, four years.
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