Market bottoms are formed when blue chips crumble: Sameer Kaul

We have seen in previous cycles that market bottoms are formed when blue chips crumble. That opportunity comes only once in a cycle, and investors should have cash in their portfolios to take advantage of that situation, if it were to arise, Sameer Kaul, MD & CEO,  TrustPlutus Wealth Managers (India), said in an interview with Moneycontrol’s Kshitij Anand.

Edited excerpt:

A) The proposals announced with regards to the stimulus package was around liquidity, especially for Individuals, MSME, and NBFC.

Support in terms of liquidity, credit guarantee, and capital in a few cases should provide a spring in the step for consumer staples, NBFC, and maybe some of the real estate companies who may expect that the higher liquidity may lead to higher disbursals leading to faster completion of pending projects.

We expect the gold loan companies to do well and banks too may see short term price appreciation given the support from the government.

A) Investing is as much about investor psychology as it is about valuations and performance. Clearly, the investor is worried and uncertain about the future.

In this situation, it is expected that the investor will become more cautious about investing in equities in the coming months.

The investment climate will become more challenging. Globally, we are seeing unprecedented levels of fiscal easing and money flow will increase dramatically.

However, the real economy will suffer due to high digitisation and low employment. Investors will have to learn to cope with higher levels of uncertainty.

A) Market bottoms are evident only in the rear-view mirror. All through previous market cycles, lows have been retested more than once before a floor is created. We expect markets to test their lows of March 2020 or thereabouts in the coming few quarters.

If the markets find support at that level and rebound from there, it could be a floor. The macro-environment also supports the view that there could be another down-cycle before the markets stabilise.

A) The reality is that despite the fall in the benchmark indices, several blue-chip companies are still trading at all-time high prices with stretched valuations.

This shows that investors have simply exited other cyclical stocks and put their money into these bellwethers. Market capitulation happens when fatigued investors sell everything and exit markets completely.

We have seen in previous cycles that market bottoms are formed when blue chips crumble. That opportunity comes only once in a cycle, and investors should have cash in their portfolios to take advantage of that situation, if it were to arise

A) The earnings of Nifty50 companies and broader market index may be revised downward based on the extent of lockdown or restriction thereafter and increasing labour issue.

Many rating agencies and authorities have revised down the GDP estimates with a negative outlook. With the earning downgrades, what may count as reasonable today may turn out to be expensive, and thus market may see this premium eroding in the medium term.

A) Someone wisely said that the returns in investments are seeded in the bear market and harvested in the bull market. Down cycles are an integral part of capitalism and every few years investors will experience the down cycle.

While the down cycle is shorter than the upcycles, these may run for 2-6 quarters after an initial sharp drop and follow by 2-3 years of recovery and bull phase thereafter.

The market has seen a similar sharp drop in Jan 2008 and recovered a bit in between, but much larger rally happened after an extended slowdown

A) The current down-cycle is not comparable to earlier cycles as in 2008 and 2011, the market dropped due to financial crises and lead to demand disruption.

This time while central banks are proactively providing the liquidity, the demand drop, as well as supply constraints, is owing to the stoppage of economic activities.

Many businesses in their mind seem to be focusing more on FY 22 and growth may only return after a year from now. However, any projection at this stage is foolhardy since we are still battling the epidemic

A) An investor should take help of professionals to assess their risk profile. Once they are aware of risk profile portfolio should be created including all asset class like debt, cash, equity, international exposure, gold and hard assets like real estate.

One of the reasons to have this diversification is to preserve capital in all kinds of economic scenario(s) and still be able to participate in growth.

Given the current environment, the investor should be prepared for Inflationary or deflationary economic outcome(s). Allocation to Gold and some of the Indian equities will bode well in an inflationary environment.

Allocation to Technology companies especially in the US, high-quality Indian companies and Bonds will help navigate the portfolio from a deflationary environment standpoint

A) The very famous line from John Maynard Keynes is – “When facts change, I change my Mind. What do you do, Sir”. Hence cutting losses is more nuanced than it is being perceived. One should act decisively if the basic investment hypothesis is violated and a new reality is completely different.

So in our view cutting losses is more bottom-up and granular exercise. One should not make these decisions in haste or extrapolate general trends or events.

One should preserve cash and have liquidity irrespective of cutting losses. Having enough liquidity as an opportunistic capital or contingency planning should be inherent in the Investment framework rather than a reaction to some specific event.

Date: May 19