Equity markets seldom give you answers to what lies ahead. Just when you think that you have a reasonable frame of reference to anticipate future trends, you realize that the markets have a mind of their own.

For the last few weeks, one has been hearing how “expensive” the Nifty is becoming and how it has always changed course from P/E levels of 24 and thereabouts eventually. There are equal arguments on how the Nifty’s rise in the recent months has been skewed, implying thereby that most sectors are yet to see P/E expansion basis the encouraging numbers they are reporting.

If the savviest of investors have not been taken in by polarizing opinions in social media already, their mindsets are being waylaid by the potential event risks like the US elections, the possibility of a second wave of coronavirus cases and the like.

As always, there are elements of truth in every view and there is no black or white way forward. Typically, this is where most investors either stay in cash, hoping for an eventual correction – or go all in, assuming that the best is yet to come.

So, what should investors do to in such markets?

Complex situations usually have simple answers and right in front of us. Let’s look at two aspects of our daily lives before we answer the question.

A] Why do we insure our assets? The premium you pay is a small consideration towards peace of mind and covering of your losses in the event of an unfortunate incident

B] In life, we always insist on having the best quality of goods and services for ourselves and our near and dear ones. This quality is not a superfluous concept in our minds but based on specific traits we expect to see in what we consume.

The simple answer, therefore, is: In today’s equity markets, as always, “Quality” is the “insurance premium” you pay for a steady, consistent growth portfolio.

Let’s deep dive into this further

If your portfolio consists of strong companies in leadership positions (be it market share, profit pool, innovation or even cost efficiency); has been delivering high Return on Capital employed (ROCEs) for the last 4-5 years AND has an earnings trajectory of over 9-10% for the next 3 years, you have a very high-Quality Portfolio.

Proof of the pudding is in the eating – At Emkay investment Managers Limited, the Smart Alpha process we run invests in a portfolio of 12-15 high conviction, high-quality stocks – all of them equi-weighted. Notwithstanding the highs and lows, the markets have been subject to in the last 12 months, “Quality” as a factor has helped us navigate it quite well.

We believe that Covid pandemic has made Indian companies more efficient, nimble, and hungrier than ever. The strong have grown stronger and the best is yet to come. If one ignores the next 4 months and focuses on the next 4 years, the amount of money that can be made from a high-quality equity portfolio may be an alluring enough prospect to overlook what is happening currently.

Article Mint