Look for strength in despair to find the next market leaders: Harini Dedhia

We have witnessed 18 months of zero returns in the stock markets. The median stock in the Indian markets have seen a 35 per cent drawdown. 41 per cent of the stocks have seen a 40 per cent drawdown. If one has a constructive view on the Indian economy and therefore on India Inc’s earnings growth, it is certainly time to build a portfolio or deploy more into equities if already invested. This is widely discussed and mostly accepted as well.

 

The most common mistake, however, is to pick up ‘fallen angels’ with a severe dose of recency bias. 52-week low lists become a common hunting ground to find investments among those that were the darlings of the market in the most recent run-up prior to the correction. Leadership, however, changes after every meaningful corrective phase in the markets.

 

 

Historically, too, the easiest money is made by those who are the most resilient in the fall. By easy, I simply mean money that is made with the least volatility, not one that entails any lesser research. An easier journey to making money ensures a better investor experience and, therefore, staying invested for longer durations, which then helps in maximising returns.

 

Analysing sectoral performance for every year in the past 20 years that Nifty saw a 10 per cent drawdown from the previous year’s close reveals a pattern that is illustrative of the same.  CATCH STOCK MARKET LIVE UPDATES TODAY    For the purpose of this analysis, we have considered sectoral indices of IT, Pharma, FMCG, Private Banks, PSU Banks, Cap Goods & Infra, which encompass the majority of the Nifty50 stocks. For every time we noted a drawdown, we shortlisted the two most resilient sectors and the two most beaten-down sectors. Resilience is defined by a combination of superior performance vs. the index and a lower drawdown during the year vs. the index. 

 

The foremost conclusion is that the most resilient sectors have had an overwhelming presence in the outperformers until the next reset (typically 2-3 years out).

• FMCG and Pharma continued to lead the markets from 2009 to 2013
• Private Banks and FMCG from 2016 to 2020.
• Pharma and IT were first movers since the lockdown was announced, and created “easy” money till the Russia-Ukraine crisis.

Since the advent of the Russia-Ukraine war, PSU banks and capital goods have been the obvious hunting ground. None of the above can be contested. The hunting ground, as per this framework, should be Private Banks and Infra. (Nifty Infra index has 20 per cent weight in Reliance Industries, 16 per cent in Bharti Airtel, 13 per cent in L&T, 4.3 per cent in NTPC, 3.8 per cent in Ultratech Cement and 2.9 per cent in Grasim Industries and so on).

 

The second inference, which perhaps should carry more weight than the previous one is the most beaten-down sectors generally underperformed the benchmarks for the following few years.

• Capital goods have been a strict no go from 2009 to 2016. They were the darlings of the market prior to the GFC crash in 2008, and perhaps one where most would have tried to hunt for bargains in the fall.
• Pharma and IT were to be avoided between 2017 and Covid-19, as well as post the Ukraine-Russia conflict.
• Banking (both private and PSUs) was a no-go between 2020 and 2022. This is not to say that they lost money in that period, but they underperformed the market.

The reason why looking at resilience vs. beaten down works is because the resilience in stock price is an outcome of either near term earnings remaining unaffected by the crisis or future growth potential being too big to ignore (at current prices) or both. This framework of analysing strength in times of hopelessness and despair can be applied to include more sectors or even to stocks.

 

So perhaps in this correction, it is time to open the list of stocks making a 52-week high rather than a 52-week low and proceed with researching interesting names from therein.

 

(Disclaimer: This article is by Harini Dedhia, fund manager, Tamohara Investment Managers . Views expressed are her own.)