The rally in Indian equity markets is in sync with the rally in global equity markets. The global liquidity and asset allocations tend to move quite seamlessly and rapidly across asset classes.
Equity markets have been on a roller coaster since the beginning of 2020. Initially, most of the markets (domestic & international) were near all-time highs (on the back of a strong CY19 —up by nearly 15 per cent-20 per cent).
In the next two months, the unprecedented lockdowns in the economies pulled down the markets by nearly 30 per cent by the end of March. It is since then that the markets have rallied by nearly 30 per cent and are now trading at just about under 10 percent levels that we saw at the beginning of CY20.
Few investors are puzzled by the recent recovery as they observe a huge disconnect with the ground reality and the equity markets. But as they say, the devil is in the details, although markets have bounced back quite sharply, there has been a significant change in sectoral trends, pre-COVID and post-COVID environment.
To start with as against the general perception and expectations, the smallcap stocks have outperformed the large and midcap stocks. As seen from the table below, in CY20 the BSE Smallcap Index is down by less than 5 percent versus the large-cap and midcap indices down by nearly 9 percent-10 percent.
In CY18 and CY 19, the smallcap stocks had significantly underperformed and lost their value (down nearly 30 percent) and valuations of many good quality smallcap stocks were probably trading below or near to replacement values for the business franchisees that they have built over many decades. From that perspective, the bounce in smallcap stocks was overdue, something that we have strongly believed since the last quarter of CY2019.
Among the sectoral trends, there too is significant divergence. The sectors that were trending in the pre-COVID environment like banking, consumer durables and realty have been the largest laggards in the post-COVID environment.
The winners have been pharma, IT, telecom and life Insurance and at the margin FMCG. More importantly, the gains in pharma (up 36 percent) and IT (up 18 percent) sectors have been highly disproportionate and lopsided as compared to some of the large sectors like banking (down 33 percent), capital goods (down 25 percent), metals (down 25 percent), power (down 20 percent) and realty (down 30 percent).
There are two key takeaways from the above trends, firstly on the portfolio positioning and secondly on the economic outlook.
1)Â On the portfolio positioning, it is largely believed that in long-term investing it is prudent to have a buy and hold approach and very low-churn portfolio activity.
It is quite true since the fun of equity investing is what Einstein had mentioned the Eighth Wonder of the World—the game of compounding and for that to happen, it is very pertinent to have a buy and hold strategy.
Albeit, there will be certain events, which will at times call for a major change in primary trends and from that perspective it is very imminent to be agile to reposition and restructure of the portfolios, aligning them to the new environment.
For our managed portfolios in the last four months, we have been more active than what we were probably been over the last couple of years. We have made changes to our allocations to align our portfolios in line with the new environment, which has been triggered due to COVID-19. We have been significantly overweight in pharma sector (15 percent-20 percent+ allocation) and that has helped our portfolios in this current difficult environment.
2)Â It is generally perceived that the capital markets are the leading indicators for the economic activity lying ahead. The current market trends are suggesting low domestic core economic activity, GDP decline and weak recovery, whereas defensive and export businesses should do relatively better.
It seems there is going to be a significant change in consumer behaviour and, in turn, a change in economic activity over the next few quarters. Therefore, in our managed portfolios, we have added stocks from sectors like telecom, life insurance, pharma and technology. We believe each of these sectors will be better placed in the post-COVID-19 scenario.
Not to forget, the rally in Indian equity markets is in sync with the rally in global equity markets. The global liquidity & asset allocations tend to move quite seamlessly & rapidly across the asset classes.
