Personal Finance

Sectors focussing on domestic economy could be in favour, says Dhiraj Relli of HDFC securities

Lokeshwarri SK | Updated on March 29, 2020 Published on March 29, 2020

Regular review of asset allocation helps reduce risk and take profit in bull period: HDFC Sec CEO

The stock market is going through a phase of unprecedented volatility. Dhiraj Relli, MD and CEO, HDFC securities, shares some insights on the mood among retail investors, and his views on how investors can navigate this rough patch, in this e-mail interaction with BusinessLine.

What is the mood among retail investors at this point? Are they looking for bargain picks or have they withdrawn from the market in a shock?

When the markets started to fall, retail investors saw this as a normal correction and were eager to add stocks. However, with the fall continuing relentlessly, they seem dejected as their portfolio values have taken a sharp hit.

Till about five odd weeks ago, they were used to the underperformance of small- and mid-cap categories out of their direct portfolio. Now, with large-caps also falling sharply, their MF holdings have also suffered a lot. Some investors who have been underinvested so far are seeing this as an opportunity to build a good portfolio.

Which category of investors are leading the sell-off? What does it tell us about the length of this correction?

Some evolved investors sold a part of their holdings over the last few weeks, irrespective of whether they were in the money or not.

Most retail investors were shell shocked into inaction and hoped that their stock values would soon come up to the previous levels.

Whether the retail investors will use the upcoming bounces to reduce their equity holdings (even at a reasonable loss) will be keenly watched.

Do you see any stress among traders, investors due to margin calls, given the sharp drop in stock prices? Can these calls lead to further price decline?

Any sharp, one-sided fall would normally lead to margin calls on traders who have either bet on the falling stocks or have given these stocks as collateral. However, the SEBI margining system, coupled with the extra margins collected by some brokers, meant that there was no major shortfall in collections of MTM (mark-to-market) from traders.

Compensatory sell-off in bluechips to offset the losses in other stocks has been observed in some cases. Again, on bounces, some more such selling can be expected.

Do you get a sense that this market fall is different from other market declines, of 2001 or 2008?

Yes. The fall in 2008 was due to the seeming collapse in the financial space due to over- leverage, defaults, downgrades, etc.

In the present juncture, the fall is due to the earnings of broader portion of the market getting impacted due to shutdowns and demand shrinkage across the globe. Also, the inter-linkages among economies is far higher than that in 2008 and hence, negative developments in one part of the globe have the power to impact several other economies.

Is there a set of rules or guidelines for investors to follow when there is panic all around?

It is important to review your asset allocation at regular intervals (say, quarterly or half-yearly) to rebalance the portfolio. For example, if equity allocation rises due to an increase in stock prices/MF scheme NAV, it should be brought down to its original levels. This approach helps in reducing the risk in the portfolio and take profits in bull periods.

Sticking to asset allocation matrix, taking regular profits and doing bottom-fishing in select stocks/MF schemes and building your own stock/mutual fund analysis and money management skills will help investors ride out turbulent times like the current one.

If investors begin to cherry-pick, which are the sectors where value can emerge first?

Once the current issue gets stabilised, we think the economies could become more inward- looking, and cross-border trade and investment could take a back seat for some time. In such an era, sectors focussing on domestic economy could come back in favour. These include financials, consumer facing sectors and domestic pharma.

What is your view on prospects of India Inc in general? Has the Covid-19 crisis dealt a blow to earnings recovery in FY21?

Yes, the wait for earnings recovery keeps getting longer. While it is too early to forecast the impact of Covid-19 on India’s GDP and hence the corporate earnings growth, if things don’t settle down in a month’s time, we could be staring at low single-digit or even no growth in corporate earnings in FY21.

This could be accentuated by the stress on fiscal deficit and domino effect of defaults and downgrades in financial sector and later in other sectors.

What can SEBI do to improve the trust that investors have in markets?

SEBI has been taking quite a few proactive steps to protect investors. The regulator and the exchanges may have to think about whether it should be so easy for promoters to raise money and list their shares on exchanges without showing enough prudent trustworthy action in the past.

Also, exchanges need to be clear as to how much do their product introduction/features help in creating wealth/ease fund-raising for genuine promoters. The speed of legal justice delivery has to improve dramatically and minority shareholders should not be made to suffer due to follies of the promoters.

Published on March 29, 2020

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