All was going well for Indian Markets until early March 2020, while the broader indices like Nifty 50 and Sensex were making new highs in last 18-24 months, beginning September 2019 until early March’20 the rally started to extend beyond top 15-20 stocks on to a lot of quality midcap and small cap companies as well. This was all backed by very strong inflows from FII and relatively steady positive flows from DIIs too.
And then came Corona/ COVID19
As the spread of the virus started to build, global markets started to correct violently with almost all major global indices correcting in the range of 35-40%. Indian markets too corrected very sharply and rather quickly with continuous selling from FIIs on a daily basis to the extent of 3000-4000 cr. All kind of companies including bluest of blue chips fell down anywhere in range of 25%-50%. Indian market cap to GDP went down from 70% to 55% (right now 49% source MOFSL) and Nifty valuations (P/E) corrected from about 28 times to 17 times. Trillions of dollars of wealth (world market cap is down ~20tn USD) has been eroded globally so far and any bottoming out of the markets is becoming very difficult to predict. It is quite likely that till such time news around any positive developments emerge on further spread of COVID 19, the markets will remain extremely volatile and could swing 5-10% either side on daily basis.
Correction Among Key Global Markets
Source – MOFSL Research, Data as on 25-03-2020.
India Market Cap to GDP (%)
Source – MOFSL Research Data as on 25-03-2020.
Nifty Trailing PE Valuations with long term average.
Source – MOFSL Research Data as on 25-03-2020.
With all these developments, we proactively started to make conference calls with our distributors and investors to update them with views on markets and our portfolios, the objective was simply to give confidence to investors that markets are reflecting the current uncertainty around corona virus and factoring in all possible negative outcomes around global economy and earnings of companies in next 1-2 quarters. Once every 10 years, markets do go through massive corrections and we have seen this in 2008 (Global Financial Crisis), but in long terms markets are all about fundamentals and delivers returns in line with the earnings of the companies. Also, after period of excessive corrections, there are periods of quick recoveries as well which again has been seen in the past on various occasions.
During these con-calls and with subsequent Q and A sessions, we were pleasantly surprised to see the maturity of investors especially the retail investors who for not even once discussed about the extent of correction or their portfolio values eroding drastically. The questions were predominantly around these areas:
1. What could be the maximum possible correction at worst?
2. Should we start to allocate money to equities now?
3. Should we put the money all in ONE GO or through SIP/ STP?
4. Should SIP/ STP being done in 2-3 months or 1 year and more?
5. Should we buy in to large caps or midcaps or Multi caps?
6. Would investing in Dynamic or Asset allocation funds make sense?
7. Which fund of Motilal Oswal should we invest in?
All of these questions did not reflect any kind of panic or urge to disinvest now, but simply trying to sense opportunity to invest at deep discounts. With these questions, we tried to create this blog through which we attempt to share our views around the questions posed most frequently to us.
Q. What could be the maximum possible correction at worst?
A. It is very difficult for anyone to predict the absolute bottom, especially in current conditions till such time the on-going issues come in control of countries which are most impacted, markets would continue to be volatile and in correcting mode. Having said so, we do feel that the correction is ‘done too much too soon’ due to rapid selling by FII’s and with very low volumes, and from here the pace of correction may not be too much, but you can never rule out 5-10% correction still in coming weeks. So, what we need to do is 1. Not get impacted looking at notional losses in our portfolios and simply SIT TIGHT at this point of time, and 2. If comfortable do try and add more money in equities to take advantage of the ongoing volatility.
Q. Should we start to allocate money in equities now?
A. Famous anecdote in equity investing is to ‘BUY LOW’ and ‘SELL HIGH’ – meaning buy on dips and reduce the cost of acquisition of equities, this will ensure guaranteed wealth creation in future. It’s the nature of markets to be volatile and we need to treat volatility as a friend than then foe. CASH is KING, some portion of your wealth should always be in cash all the time, so that whenever there are significant corrections in markets due to whatever reason, your CASH can be put to good use in such times. So surely, it’s a buyer’s market and if you have cash and courage than this is TIME to start allocating to equities.
Q. Should we put the money all in ONE GO or through SIP/ STP? Should SIP/ STP being done in 2-3 months or 1 year and more?
A. At current levels, there is really no harm investing at one go, but it is always advisable to stagger the investment in current situation may be on a weekly basis than monthly basis. The purpose of SIP or let’s put it this way SIP’s work the best when you get opportunities to see your instalments getting bought at lower prices resulting in accumulation of more numbers of units which would have a significant payoff in long term. Look at this way, if you were buying only on rising prices than the averaging would only higher and in times of corrections your portfolio will have higher relative under-performance. To avoid this, we need to ensure existing SIP’s continue, and new SIP’s are initiated TODAY than Tomorrow. ‘Time to BUY is NOW’.
Q. Should we buy in to large caps or midcaps or Multi caps?
A. We emphasize that companies across all market-cap buckets make money, timing large caps or midcaps could be a futile exercise and therefore it is always advisable to have a portfolio with mix of large – mid and small-cap companies which are of top most quality with high levels of sustainable growth. Thus, it would make sense to invest in multi-cap or large and midcap category funds. This will ensure you have best of both the world and be absolved with the mystery and challenge of trying to time the bottoms and tops of large caps and mid cap cycles. Also, data suggests that the volatility measured by standard deviations are much lower as compared to pure large or mid cap oriented funds, meaning you will make superior risk adjusted returns in long run.
Q. Would investing Dynamic or Asset allocation funds make sense?
A. This is another challenge faced by investors wanting to invest in equities finding difficult to decide when to buy and when to sell, thereafter who much to buy and how much to sell. These answers lie in the valuations of markets, as markets go up the valuations get premium and as it goes down the valuation go in discount. Obviously, it is always better to buy when valuations are cheap and low, which means markets have corrected and prices have come down and it’s the time to increase equity allocations. Investors in such dilemma have the option to look at Dynamic or balance advantage category funds which use various valuation matrices to arrive at understanding how expensive or cheap the market is and then using such model determine appropriate allocations between equities and debt. For example, in current markets – valuations are getting discounted and the valuation models are suggesting gradual increase the exposure to equities, similarly as markets will go up the allocation to equities will reduce. So the Buy Low and Sell High fundamental works best in this category of funds.
Q. Which fund of Motilal Oswal should we invest in?
A. Given what we have recommended above, investors should look at ‘Motilal Oswal Large & Mid Cap Fund’ for pure equity exposure, this fund is invested 50:50 between large and midcap companies with investments in very high quality companies for long term growth.
And for those who want to go little conservative and take balanced approach, they should look at ‘Motilal Oswal Dynamic Fund’ where the fund manager uses in-house sophisticated valuation model called ‘MOVI’ (Motilal Oswal Value Index) derived using P/E, P/B and Dividend Yield parameters to decide allocations between Debt and Equity asset class dynamically. This Mutual fund will help you invest more in equities in falling markets and reduce equities in rising markets. At current levels, the fund has deployed 70-75% in equities and balance in debt. The volatility of this fund is almost half of that of Nifty and hence in long run you will have a smooth journey without going through too much of ups and downs in portfolio and stable return. Those, who are also at wanting regular liquidity for the monthly expenses can consider this fund through the SWP (systematic Withdrawal Plan) option, which allows liquidity up to 12% annually with any penalty charges. These withdrawals can be taken monthly or quarterly or yearly as per the need.
So, in this short note we have tried to give you broad perspective on the markets and the ongoing CONVID 19 issue. We have tried to address some of the burning questions you may have with some of the solutions we think are opportune for you to consider while evaluating your existing portfolios as well as making fresh allocations.
For any queries please feel to reach out us anytime.
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