High inflation is the key risk for the market at this point, says Deepak Jasani, Head of Retail Research, HDFC securities. In an interview with MintGenie, Jasani said investors need to try and separate the long-term holds from the short-term ones and take appropriate action.
Edited excerpts:
Many analysts say this is the time to accumulate stocks for the long term. But what to buy at this point? What are your preferred sectors at this juncture?
Historically, Indian indices have fallen anywhere between 10-13% from the long-term top or 18-39% from the top, if we exclude the sharper dips after 2000 and 2008 tops.
Hence even though the Nifty has fallen nearly 15% from the highs of 18604, there is a possibility that we may not have yet seen a sustainable bottom in the markets. This may be due to the fact that interest rates globally have not peaked.
In this background, debt may become attractive globally and money could flow from equities to debt. Rising rates may result in valuations of equities dipping due to the lower present value of future cash flows.
Rising rates could also increase the pain for industries dependent on leverage and may create problems for firms that are already indebted and are finding it difficult to service borrowings.
In case one still wants to accumulate stocks, they can look at stocks from the auto, capital goods, FMCG, and telecom sectors.
Do you think that the worst is behind us? What are the top triggers for the market now given the fact that the rate hikes are widely expected, and inflation is sticky?
The key risk for the markets currently is high inflation. The other risks are largely the effects of high inflation. High inflation forces central banks to take a hawkish stance and raise rates.
This impacts the tempo of economic growth and valuations of equities and debt.
A sharp rise in rates in a small-time window can lead to a recession in some economies as this shock affects sentiments across the population.
As and when inflation begins to fall sustainably, the risk of rate hikes will reduce, and the world may be able to recover growth momentum over time.
A fall in inflation will lead to other issues getting sorted out within a short period of time.
What will you recommend to new investors? Should they sit on cash or raise exposure to equities?
New investors may not have a path as easy as was the case in March/April 2020. Valuations now are not as attractive, and visibility of earnings growth has also been impacted. This apart FPIs now are in a hurry to cut their exposure to emerging market equities.
New investors should ideally: 1. Read up books and articles on investing by gurus and devote time to honing their stock selection and money management skills. 2. Figure out their risk appetite; how much loss they would be willing to bear without panicking. 3. Decide their return expectations. 4. In case they are not able to devote time to developing their own skills, they might as well take the help of mutual funds and refrain from direct investing.
Having done all these, they also need to try and separate the long-term holds from the short-term investment bets and take appropriate action on them. They also need to keep their return expectations under check.
If they have no or little exposure to equities this is as good as any time to start investing in a staggered manner.
Inflation is the biggest concern at this time. What can be an ideal strategy for investment to beat inflation?
In inflationary times investors can benefit by investing in real estate (through REITs), commodities (little scope to invest in India currently), value stocks among consumer categories, fixed income instruments locking in higher rates for a long period, some amount of gold.
They can invest in companies that generate a lot of cash rather than consume cash, companies that have pricing power and are able to maintain/expand margins in such times.
They also need to get out of bad businesses as these will do worse in the era of high inflation. They also need to remember that inflationary times don’t last forever and hence panicky reactions may be avoided except for a few decisions that can be justified even in normal times.
Is it a bear market? What are some key parameters to keep in mind while choosing a stock during a bear market?
While as per the normal condition, the Nifty has yet not fallen more than 20% from the recent high and hence is not into a bear market, a lot of stocks have gone much below 20% from their recent highs.
In such times, investors need to wait out the phase and not put all monies into stocks at the first signs of weakness.
These phases last anywhere between 8 months to 21 months and will keep giving you the chance of investing. Hence staggered investment is preferred. One also needs to raise exposure to dividend-yielding stocks where the business models are robust and not cyclical.
Minimum exposure needs to be taken in highly leveraged or so-called turnaround companies.
Mid and smallcaps are witnessing more pressure than the largecaps. Is it time to stick to just largecaps and stay away from mid and smallcap space?
Small and Midcap stocks or indices are high beta and hence they rise and fall more than the largecap index. Depending on your risk appetite, exposure to small and midcap stocks needs to be maintained at all times through the proportion may be upped or cut from time to time.
Small and midcap stocks will provide you alpha in case you have invested in the right stocks at the right time. Otherwise, they could pull down your overall portfolio returns
Disclaimer: The views and recommendations made above are those of the analyst and not of MintGenie.
