In our view, all possible major short-term concerns are behind us:
- Oil price has corrected about 30%;
- Elections for the major states are over;
- Market has discounted the impact of resignation of the Reserve Bank of India (RBI) Governor, Urjit Patel;
- Trade wars at global level are almost at peak - now both the US and China are under pressures to talk to to resolve the issues. Any further aggressive position by the US will create more deflationary pressures, which would help in moderating the oil price;
Overall market-cap is down by Rs 22 lakh crore, mostly by the small-and-mid cap stocks. Nearly 1,000 stocks are down by 50% from heir peak prices. Indian equity market is peculiar in the world - more than 7,000 stocks are listed and around 4,000 stocks are actively traded. This market has a large number of small and mid cap stocks - they create huge wealth periodically in the long run. Of course, the risk is from stock selection.
If we do not compromise on four key parameters (management quality, leveraging position, working capital stress and valuation parameters), these stocks keep creating wealth in the long run (in about 3 years, though they create pain in the short to medium terms).
Our firm belief is that the current market structure provides a good opportunity to raise the portfolio of value stocks. As we have been saying, the only possible risk is a major political instability post general election in 2019. So now, there is a trade off - whether to take that possible risk or use the current opportunity to build good long-term portfolio at very cheap valuations.
We prefer to take the possible risk. In the worst possible scenario, if political instability arises, we will have to wait for another 2.5 years (history suggests that such unstable governments fall in about 2.5 years).
Hence, investors who are in a comfortable position (least debt or no debt, not dependent on equity asset class to maintain financial requirements, risk profile allows to remain passive on the equity investments, etc) to pool more resources to add quality stocks.
The author is managing director and founder of Equinomics Research. Views expressed are his own