View: Tops and bottoms are only for fools, focus on your responses to navigate volatility

By Devang Mehta

While I write this piece with all humility and modesty about the state of the financial markets, my heart wishes everyone to be safe and staying healthy. This too shall pass. God bless us all.

All of us are going through a situation, which clearly is an unknown and uncharted one. These are unprecedented times and by no means, we can undermine or overstate the impact on health, wealth and bliss.

How we react to this is what will define us in the medium term. I was taught very early in my life to ‘Focus on Controllable’, and I clearly feel when a situation is not under control, you need to focus on your response to stimulus rather than focusing only on the negative aspects of stimulus. I know it's easier said than done, but there is no other way you can address it. More often than not it turns out to be an opportunity in adversity.

Almost all the above written words stand true for markets and portfolios. Controlling markets is not under our control, but how to navigate our portfolios through it is probably, where we can attempt to take charge. Being pessimistic in pessimism is a fashion and vice versa.

Let's take stock of some positives. All negatives are available at the touch of a finger. Indian macros will have one of the best times in the near future. With crude being where it is, inflation trending down, interest rates bound south, global dependence for trade being low, strong domestic driven economy and demographics are few, which I can safely state. The government and the Reserve Bank of India will also come forward in such times and announce an economic package, which is the need of the hour. Desperate times call for desperate measures; global economies have already put in substantial stimulus. There is no point speculating what will be announced, but it has to be something out of the ordinary without worrying about the fiscal deficit.

Coming to micros, corporate earnings will clearly suffer due to the impending health crisis. But whether the markets have already factored in is a matter of debate and will be known in the earnings season in the form of numbers and management comments. So earnings is one thing which will vary from company to company and industry to industry.

The biggest positive for us is valuations, which always is the most critical part in any equity investment decision. While the most common parameter to weigh the markets is PE ratio, let's not estimate earnings during such times. While earnings will be cut whether the stock correcting by 40, 50, 60 per cent is justified, the answer has to be no. There also is fine franchise value and brand value attached to a number of these great companies. More importantly, price to book value at a market level now stands at almost 2008 levels and market cap to GDP stands at 50 per cent, much below the average of 78 per cent.

FIIs have been on a selling spree in March and even good news will be sold into. But at the first evidence of a positive development in the ongoing issue and a bit of financial market calmness, India will have its fair share of fresh allocations. Whether we want to follow them or be a little ahead of them is a decision, which needs to be taken. Sentiment will not be supportive in such times, as they say either you get good prices and valuations to buy or you get good news. Buying on good news will have a probability of lower returns.

Tops and bottoms are only for fools. While no one can ever call an exact bottom, but our time tested approach to construct holistic and personalised portfolios and invest in tranches can pay rich dividends over the next three to five years. We believe in three pillars of our investment philosophy.

1. Size of the market opportunity
2. Market share of the company
3. Margin of safety.

These give us enough courage to stick with market leaders having monopolistic or oligopolistic advantages along with pricing power, which you always wanted to buy but are now offering you enough margin of safety and a good risk reward ratio for the longer term.

In spite of you owning some excellent companies, Stock prices sometimes are hammered with no change in fundamentals. If these companies’ products and services are vital to society and are market leaders or high market share players with a moat, they will eventually emerge stronger. At worst, they may suffer for a few quarters. Few quarters is nothing in the long life of these companies. Staying the course is… for companies & investors....

Once again, stay safe and healthy.

(Devang Mehta is Head of Equity Advisory at Centrum Wealth)