Valuations of the domestic equity market have become a big draw with the recent correction and there is an opportunity for investors to make the most of it. Valuations are not as low as they were during the global financial crisis in 2008-09 or even in 2003-04.
The economic slowdown in the short-term is inevitable and could impact the FY21 earnings but added that a rebound post-crisis could be sharper than expected, based on past experiences. The lesson from history is that rebound in economic activity could be sharp after a crisis.
However, Foreign Institutional Investors (FIIs) have alone pulled out more than Rs 60,000 cr from the cash segment of the Indian equity market in March alone.
Impact on Economy
- The economic activity has dropped sharply due to the lockdown but this could be partially mitigated from the benefit of lower oil prices.
- Corporate sales growth and profits will likely be adversely affected by FY21. But if the period can be navigated, then the recovery would be quick thereafter.
Strategy
Investor behavior and overall flows have been quite encouraging. Not being reactive to the fast-changing situation is suggested to all the investors. Hence, it has been recommended for investors to stick to their asset allocation plans and rebalance in line with that.
In terms of strategy, allocations for all the margins have been shifted towards companies that are likely to emerge stronger from this challenging economic environment and uncertainty and are supported by attractive valuations. Over time if new structural trends emerge, the impact will have to be considered undoubtedly.
Sectors
At a time when the market has been in the downward journey, there are value buys across sectors. Some businesses are expected to benefit from trends like increased work from home if that were to become a structural trend.
However, sectors such as hospitality and travel may experience stress for a longer time.
Fund houses are picking companies rather than sectors that are believed to be a more crucial source of Alpha as the economy navigates this challenging period. (Alpha is a measure of the active return on an investment, the performance of that investment compared with a suitable market index.)
