Don't have cash? Sit tight, don't sell now: Abhimanyu Sofat

How are you coping up with the sell off?
Investors have started panicking and asking what they should do with their loss-making SIPs. We saw a similar behaviour in 2008. The one clear difference is the leverage in the system is significantly lower relative to what it was in 2008.

There are individual stories of people losing out big time. Yes, they have lost part of their capital but they have not gone negative per se except for somebody who had traded in stocks like YES Bank. Overall, our view is that if you look at the Nifty, you can broadly classify it into three different parts. One is the commodity part of the market, second is the financial and third is the safer side which is utilities, FMCG and IT.

All three are one-third each in terms of the index. We feel that going forward the cut in case of commodities could be close to 25%, 15% in case of financials and 10% in case of the remaining safe haven stocks. Blended, we are looking at EPS downgrade of close to around 15%.

Right now, in terms of price to book, we are trading at close to 2.4 on a trailing basis. The least we have gone through in previous cycles of 2008 or may be 2002 was close to around 1.7-1.8. We believe 7,500 is a level at which a lot of the uncertainty would get priced in, since interest rates might also at that particular point of time, come down by at least 150 bps from where they are right now. Equities will become quite attractive.

Right now, we are telling investors to stay with high quality FMCG companies and insurance companies like SBI Life Insurance. If you want to participate in the midcap side, then there are stocks like Deepak Nitrite, Navin Fluorine and Gujarat Gas. Those are the kind of stocks that we are recommending to them. So, broadly, if you want to be in the market, then these are the stocks and sectors to be in. Otherwise, let us see what happens in the US, Italy when the containment starts to have an effect. Then, over a period of time, we will see other countries also following that up. Eventually, we will get out of it. The only question is at what time? I am not that worried for the long term, it may be just for a quarter or two. From a 10-year perspective, it does not as such have a big impact.

The easy answer which I am getting from everyone is that buy small quantities, buy good companies. My follow-up question to everyone is that who has the cash? If one does not have the cash to put to work, how does one churn the portfolio get rid of smallcaps and midcaps?
The first thing to see is the timeframe of the investment. If the investment was for a short period of 15 to 20 days, obviously at certain stop losses, he should have exited that position. But what happens to an investor with a three-year horizon? Seeing China’s success in containing the contagion, it seems unlikely that Coronavirus will have the same intense impact over the next three years. Right now, one can assume that over a period of one or two quarters, this will fade away and then a rebound in earnings can be expected.

For example, for the US market, a sharp deceleration in earnings over the next two quarters and then a significant pickup is expected as people are able to take care of the crisis. So, I do not think you need to do anything. There are a lot of people who are just stuck in their positions and do not know what to do. Let them just continue with those positions. If they do not have cash, they anyway cannot do it. What is the point of selling?

I do not see any logic for them to do any activity. Sometimes, being passive itself is a decent enough strategy.

Assuming you had a portfolio on 21st of January 2008 or before 24th of October 2008, whenever the market has dipped, eventually it has come back. Mean reversion is very powerful. We have now just in the last two days, we have come below the historical average in terms of PE for the index, which is for a very short duration of time and we have been talking about recession. Let time go by. This is not a V-shaped kind of a market.

What are the pockets which would benefit? Everything has turned upside down and it is becoming a little difficult to anticipate exactly where we will manage to see relief particularly as we are still anticipating some kind of fiscal measures or a greater boost from the RBI?
Fiscal measures are not what lead to the market going up in a major way. What we have seen is that China’s market is doing pretty well over the last one month because they focussed on the problem which was that you needed to have people quarantined as well as do maximum testing. Since they had a very good infrastructure, they were able to do that.

Coming to the Indian market, there are some pockets which have become quite interesting and with the coronavirus challenge, these pockets are likely to do pretty well going forward. One is the telecom sector. We are seeing most of the issues getting resolved. So, a stock like Bharti Airtel should do pretty well going forward. We have seen around $8 billion of timely fund raise before the credit squeeze happening in the international debt market. The ARPUs have been increasing and competition from Vodafone will reduce drastically even if Vodafone survives. With people doing more work from home and talking more on phones, the telecom sector is one clear winner and Bharti Airtel should be one top stock that one can look at buying.

The other stock that one can obviously look at is HUL. People have started hoarding essential, FMCG products and for that reason, we do not see any demand tapering for these companies. From large caps, these are two companies which one can clearly buy at this particular point of time and not get worried about the ultimate level of the index