Stock Fundamentals

‘In 3 years, markets recover to cross their earlier peaks’

Lokeshwarri SK Chennai | Updated on April 09, 2020 Published on April 09, 2020

But normally, after such deep corrections, markets take about 12-18 months on an average, to bottom out, says Krishna Kumar Karwa

Given the sharp correction in stock market, investors are a worried lot these days. Krishna Kumar Karwa, Managing Director, Emkay Global Financial Services, counsels investors to remember that NAV is just a number, and notional loss or notional profit has no meaning unless it is actually booked.

Stock prices have crashed across the board in March. Do you think the bottom is here?

The markets have corrected almost 30 per cent from the peak in the last two months. The fact is that, so far, we have not found a lasting remedy for the Covid-19 pandemic. The developed and developing economies across the world are implementing monetary and fiscal stimulus measures to mitigate the likely impact of the impending recession and the associated job losses. India has still to see the flattening of the curve of this pandemic and is also grappling to limit the impact on the vulnerable segments of our society, and SMEs and MSMEs. The extremely sharp correction in global crude prices, though generally good for the Indian economy, may have some negative impact on certain asset prices. Therefore, it is too early to make a fair assessment of the economic costs. Normally, after such deep corrections, irrespective of the reasons, markets take about 12-18 months on an average, to bottom out.

What are your projections for Nifty50 EPS for FY21?

It is early days to make any forecasts for FY21, Nifty 50 EPS. Please remember, we are dealing with an unprecedented global health crisis, not seen by any of us in the past. Financial stimulus cannot work beyond a point unless people feel sufficiently safe to venture out of their homes to work and engage in economic activity. In the face of such uncertainty, even the RBI has indicated that the trajectory of GDP growth and inflation is highly uncertain. Investors should focus on valuation tools like Price to Book(P/B) or EV/EBIDTA on trailing basis and compare it with historical lows for companies. But as I have indicated earlier, the current Nifty P/B is close to its historical lows.

Which sectors are likely to witness a sharper downward revision in earnings for FY21?

Except for sectors like pharma and healthcare, and possibly telecom, and certain regulated return businesses like power generation and transmission, almost all other sectors are likely to see a deep cut in earnings projections for FY 21. There is a remote possibility that IT sector may come out of this crisis relatively unscathed, though it is early days. Consumer staples may witness minimum demand destruction and may also benefit from lower crude prices.

Do you think value is emerging in mid and small cap stocks? Should investors buy them?

Investors should be evaluating every company on its sector leadership ranking and the strength of its balance sheet. In these uncertain times, 9 times out of 10, it will be the sector leaders with robust balance sheets who will emerge winners over time. Having said that, inherently small and mid-caps are more vulnerable than large caps, and investors should be cognizant of this risk when allocating money between large versus mid and small caps.

Many investors are turning risk averse and withdrawing from the market. What would be your advice?

Investors should have seasoned wealth advisors to help them make the appropriate asset allocation plans based on their future needs/current income and inherent risk appetite. In such turbulent times, it would be wrong to revise such carefully drafted asset allocation plans. Please remember that NAV is just a number, and notional loss or notional profit has no meaning unless you actually book the loss or profit. Normally, within 3 years, markets recover to cross their earlier peaks. This is an ideal time for investors to review their asset allocation, and possibly increase their equity exposure. Having said that, direct equity, mutual fund or PMS investments should be reviewed, and appropriate course correction should be carried out if required.

Published on April 09, 2020

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