The Hungama of the 2024 election is behind us. A lot of time has been spent planning and hedging for this event; now we can get back to the basics and start taking investing decisions.
We at Congruence Advisers went into this election having decided to do nothing drastic on the portfolio; the last stock addition was in November 2023. We did take a slightly conservative stance in the run up to the election; loading up on the themes that had led the market run was fraught with some risk in our opinion. Neither did we see too much value in the pockets that hadn’t done much for 2+ years; numbers across IT Services, consumer staples and discretionary weren’t giving us too much comfort given the valuation multiples there. The market in it’s wisdom appears to have decided in the past 10 days that defensives at 50 PE are safer than loading up on the stars of the current run at 50 PE. Just that we aren’t yet sure if this bump up in investor interest is durable. Early positioning by itself doesn’t result in good returns, it only puts a floor under stock prices that are already a bit deflated. A sustained rise in prices need growth & earnings to fall into place. Pure hope is rarely a good active investing strategy; and buying because other are buying rarely leads to conviction.
The run up in some of the good quality industrials and capital goods has been mind boggling. Investors who were scoffing at paying 60+ PE for FMCG players are gladly loading up on MNC industrial plays at higher PE multiples today. Of course, order books are healthy and businesses are growing but that doesn’t mean gravity won’t affect prices. We believe we might be headed into a zone of hygienic return in these pockets but at much higher risk. Money that was sitting by the sidelines waiting for political clarity is bound to come in soon, if it hasn’t already hit the markets. And a good chunk of this money will naturally chase stocks that have delivered the best stock price and earnings growth over the past 2 years. We can see why some smart hands are taking their bets in FMCG & IT instead, they are only settling for much lower risk for the same level of expected return. Large funds are mandated to deploy into equities, they sometimes have to choose the lesser amongst many evils.
This is where retail investors have an advantage, you don’t have anyone to answer to or any mandate to stick to. You can sit back and ask yourself “Do I expect this business to grow earnings at 18%+ p.a. over the next 3 years to be able to justify a PE multiple of 35x at an ROCE of 20%+?”. If not, you can put your money to work in fixed income rather than buy equity at any price. It sometimes concerns us that many young investors of today have neither the understanding nor the inclination to invest into fixed income. Even after accounting for the tax disadvantage w.r.t equity, fixed income allocation balances out some of the risks at the overall level. If not anything else, fixed income gives you dry powder to tap into when the equity market gives you one of those good buying opportunities.
We were pleasantly shocked with the market data from last week. Looks like retail plunked in more than 20,000 Cr on June 4 in the face of political continuity risk that many seasoned investors were scared of. We weren’t brave enough to do any buying that day, maybe that’s what happens when you have seen multiple 30%+ corrections in the past. I made the most of the 2011-13 equity market because I was naive and did not understand risks well enough, not because I was good. We suspect that many of the investors today who see every dip as a buying opportunity might not have been around in the market between 2009-14. Risk management looks silly until the day we need it the most; then it becomes the most important thing.
We reckon it is time to have a firm eye on buying right in such market phases; though we aren’t sounding alarm bells yet on the entire market being overpriced. We are still able to find some a respectable number of ideas at reasonable valuation, if we work hard enough. In a weird way, having no allegiance to a theme or a dominant style works well for idea generation. Professional fund managers who have marketed their funds on a specific theme will look silly if they start deviating too much from the same. Retail investor and boutique advisers like us can change our minds and be agile enough. Sometimes we need to count our blessings as investors; investing is one of the few domains where scale can work against you beyond a point.
At the same time we need to focus on getting things right over the medium term. Going by the nature of the Indian market, the next 5 years are likely to have at least 2 good years for the stock market; we need to make these count. Also remember that an excellent year is rarely followed by another excellent year, unless we see the miracle of both capex and consumption firing simultaneously in FY25 & FY26. At some point in CY24 the market may well go into a mood of “Enough of hope and optimism, show me the numbers now”. A one sided market rally from here may well present an opportunity to do risk management based pruning and lighten up a few positions, if not the overall equity allocation.
Rational expectations will be a good starting point right now. Market breadth will tell us the bigger picture rather than an excessive focus on the NIFTY 50 or the NIFTY NEXT 50.
Unless the market goes into correction mode, there is a party on in some sector or segment. Having a wide enough coverage universe will minimize the possibility of missing out on a easy party.