How would you advise those investors who have dabbled in stocks with perhaps not very astute fundamentals and gone for volatile names within the small cap universe?
Typically if we look at a slightly medium to long term phenomena, in a bullish market, the set of high quality stocks always move up first. Then more money keeps coming in and that keeps looking for the next set of stocks which are slightly lower than the best of the quality but more attractive on the valuation. That second set of quality stocks can move. Then comes the third phase which is risky when either simply for the sake of valuation or for not having participated so long, the last set of money goes into completely non-quality stocks. Those stocks participate as long as the bullish phenomena continues. If that does not continue, then this third set of low quality or bad quality stocks suffer first.
If we look at the market over a period of about 15 days or so, after peaking out earlier at 15,500 odd, Nifty went down to 14,500, from which it has moved up again. The last two days of last week have been negative again. So it is difficult to say going forward where the market will go but keeping this in mind this 15 days’ movement and volatility, it is the third set of low quality stocks which will be the first ones to suffer, first one to take a knock and which is what is happening.
So if at all one has to give advice, if you are in profit, very lucky. Book profit and get out at least partly if not fully even if you have confidence in the market. If you are in marginal loss, then also yes cut those losses and try to get into good quality stocks. Wait for more market correction if it comes. If it does not come, even then remain in the high quality stocks. If you are in deep losses, even then exit. If some stocks could not move even in such a bullish phase of market, then it is natural that there is a problem with those stocks either in terms of financials or in terms of buying interest from market participants. Somehow some people have got stuck in these stocks either on the basis of news flow or tips or some non-fundamental reasons.
So the best advice is to get out. There are always two things in the market — what and when. What to buy and when to buy. Focus should be on what to buy. Even if you buy a good quality stocks at a wrong time, the ‘when’ will get corrected eventually in the next round of market upward movement.
Would you say top-down, you got to rethink your positions in FMCG and staples?
FMCG large cap stocks have largely remained underperformers in the last 3-6 months of market rise. So this is not the time at all. Secondly, as a strategy, at the highs of the market like now, the strategy should be to remain exposed or to increase exposure to the low beta stocks and not vice versa.
Thirdly, they are all quality financials. So yes, because of increasing commodity prices, their margins may get impacted a little bit. Companies are trying to fight this with two-three strategies. a) By partly increasing the price hikes so that demand does not suffer. b) By managing inventory. c) managing costs; and d) by hoping that the sharp commodity price rise will eventually revert to the mean. These are the reasons I would not suggest to stay away from FMCG at this point of time. The fundamentals of these high beta stocks like commodities, metals may not have weakened, but that is a space that can easily be used to book profit either because of the correction in the market or because if the prices of the commodities start correcting, these kinds of stocks will be the first ones to correct. So metals is one space one can stay away from.
Similarly, I always remain confused about the whole oil refining and marketing companies. With Brent price continuously going up, how will their margins suffer and what will be the impact on the margins? So that is a space where one can book profit. As I said, financially and fundamentally they may not be the bad space but if we are trying to look at the market at the current point of time, expecting a correction and within that on a relative basis trying to see where to avoid or where to exit or where to book profit, these are the spaces one can look at.