Indian markets are touching new highs as foreign fund flow continues to be strong. Headline large-cap indices (Nifty & Sensex) are at life highs, but the mid & small-cap indices are still significantly below (10%-20%) the highs. Albeit the mid & small-cap indices are still significantly below (10%-20%) the highs. Albeit the mid & small-cap stocks have begun to outperform in the CY2020.

CY2020 has been a year of change of trends in many ways, as compared to a narrow market movement of CY2018 and CY2019, the market rally is much more broad-based in CY2020, and the BSE Small-Cap index has gained more than 12% v/s the large-cap indices (Sensex & Nifty) flat for last eleven months.

Even amongst the sectors, the Healthcare Sector & IT Sector have gained over 40% v/s banking, real estate, capital goods, power sector stocks losing more than 10%-15%. In fact, if one looks at BSE200 index, 150 of 170 non-Sensex stocks are trading above 200 DMA, the highest since September 14.

The pandemic has played the role of a catalyst by bringing cost efficiencies and balance sheet discipline across sectors/companies. The cost controls exercised by the companies as well as shedding of working capital has resulted in reducing excess flab, both on P&L account as well as the balance sheet.

Within BSE200 Index, companies (excluding banks and financials) have reduced costs by ~6% YoY, achieved by largely cutting the expenses other than salary.

This is when the consumer price inflation has inched up to 7% for almost the last seven months. A slight tailwind in the economic growth (for which green shoots are already visible) and an uptick in aggregate demand will set India Inc for multi-year very-strong-earnings-growth trajectory.  Just to put a thing in perspective, 40% of the companies listed on BSE and having quarterly EBIDTA of more than Rs 10 crore, have reported 20%+ growth in EBIDTA for September 20 quarter and an expansion in EBIDTA margins.

When Investors are directly investing in equity markets, high importance should be given to management quality. It is the management quality factors (all three – Integrity, Strategy & Execution), which act as a differentiator between successful investments and not-so-successful holdings, over a longer period of 5-10 years or more.

The following construct to identify businesses usually generates wealth for shareholders – Track record, Business Scalability, Inherent Profitability, Management Quality & Valuation. While the first three points are more of a science, the fourth point is a mix of science & art, the last point of valuation, in our belief, is more of an art. An active fund manager is diligent & always following this framework, so it is logical to entrust the money to a professional fund manager.

While timing the market is difficult, one always needs to be mindful of the price one is paying for the asset.

It is highly important for an investor to arrive at an appropriate risk-reward matrix to determine the purchase price to earn adequate returns over a period of time. Purchase price discipline supports the margin of safety – Capital Preservation and also ensures decent returns.