Cut Losses In Laggards And Give Time For Winners To Run
Indian stock markets are witnessing an increase in volatility in recent times; and going by the number of events coming up in the global and local arenas, stocks are expected to remain choppy. In this scenario, Marketsmith India, a part of global equity research and fund house William O'Neil India, has been careful in adding stocks to its model portfolio. To find out more about how investors can navigate this market, Vipin Khare, Director-Research, William O’Neil India said this to Businessworld’s Clifford Alvares.
How do you see the US and India markets playing out? Both are near their highs.
The US has been the standout developed market and India has also done well amongst emerging markets over the last few months. These are also our highest conviction markets for now.
Our US strategist believes that since 1950 there have been only 10 instances when the US market ended up higher in all three months of May, June, and July. In all the ten instances, the market for the year ended higher in December than where it was in July. Moreover, this has been one of the strongest earnings seasons since 2013 for the US companies. We believe that if the current business momentum continues, earnings growth could continue to be strong in which case markets are likely to grind higher from now till the end of the year.
India particularly has done reasonably well in 2018 given the constructive steps taken by the regulators and the government. So far we have seen advanced surveillance mechanism, increase in minimum support prices, active rationalisation of Goods and Service tax (GST) across a wide range of goods (over 80 in the most recent list) that have contributed to stronger market sentiment.
On the macro front, monsoon so far has been 90-95% of the long period average a shade below expectations. Globally trade tensions between large developed economies have led to broad-based currency depreciation across markets in an attempt to offset the impact of higher levies. US action on Iran could further lead to supply issues thereby impacting oil prices – which could impact inflation and interest rate forecasts in India.
Where do you see the Indian markets heading?
For now, we believe India market is in a confirmed uptrend. We changed the status in early July 2018. Despite the small and mid caps indices correcting by -18% and -9% since Jan 2018, India nifty has been up 9% YTD and is up 4.5% since we saw the signs of an uptrend resuming just a month back in July. This has been a remarkable performance given what some of the markets like Hong Kong – which is down -9% YTD - have done in 2018 to given that most of the emerging markets are down 5-10% in 2018, so far. FIIs have reduced their exposure in the Indian market considerably in the past seven months. They have turned net sellers in five of those months and have withdrawn almost Rs 36,000 crore year-to-date, which is more than 80% of the amount withdrawn in 2017.
What are the sectors particularly standing out in this market?
The top four sectors i.e. Financial Services, Energy, Information Technology and Consumer Goods carry more than three-fourths weight in the Nifty index. Over the last three months, key large stocks from these sectors have gained the most. Whereas Auto and Pharma sector has lagged the markets in the earnings season so far. Airline stocks globally have been under pressure and India is no exception. Large airline stocks across geographies have all reported strong measure to shore up core organic business operations.
Are you adding more stocks to your model portfolio?
Our stock selection rate has gone down sharply and now of all the stocks that flash green on our buy screens, we are extremely selective in adding stocks to our portfolio. We manage a very active list of stocks that are doing well in our portfolio. We also highlight key stocks on our buy watch list and stocks we are monitoring in our sell watch list. The list includes a mix of large cap, mid cap and small cap stocks listed in India and is available at marketsmithindia.com. In India key stocks that have done well for our portfolio or where our global analyst team has a strong conviction are IndusInd bank, Ipca Labs, Asian Paints, Page industries, Reliance and some of the IT stocks.
How Should Investors Approach the Current Market?
As always, there are multiple scenarios that can play out in the market, and hence investors should not get themselves into the prediction game. The best way to handle any type of market be it an uptrend, downtrend or choppy is to interpret the market action correctly. The current market is not for the unseasoned investors looking to make quick returns. Like any other time, it needs a lot of discipline and sound buying and selling rules.
The key to sound stock market investing is simple. Select your list of fundamentally strong stocks that have a strong management, sound financials i.e. make profits, generate cash, and have an edge over their peers in terms of better product or differentiated services. Once you have your list of stocks, focus on market and price volume signals to increase your conviction in your current holdings. Consider cutting your losses short in your portfolio laggards while the winners can be given some more time to run. The process is much simpler for small investors compared with large fund managers who manage billions of dollars and have strict norms to adhere to.
While the frontline indices are close to their all-time highs, we have seen fresh signs of distribution (market declines on higher volumes) during the last week. This certainly does not ring the exit bells but a cautious approach is warranted. However, if you notice rising distribution in the general market and find your winners breaching their key moving averages; consider booking profits and reducing your exposure in the market. With the market being choppy for the most part of the year, market participants would be better off in taking profits off the table regularly.
