Why this might be a good time to buy quality stocks

Amitabh Tiwari & K Shankar
·3-min read
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There is carnage in the markets. The Sensex has been tumbling this week having lost 1.5% in a single day on March 25. It has desperately tried to claw back today (March 26) having gained 800 points (intra-day, at the time of going to the press).

But, from its high point this year after the Budget, the benchmark index has tanked by around 7.5%. All the sectoral indices were in the red Nifty PSU Bank index shed 4 percent, while auto and energy indices slipped more than 2 percent.

The selloff has been fuelled by rising coronavirus cases (new strain), inflation worries, rising prices of crude oil, a spike in bond yields and fear of return of lockdowns.

Last 3 Month Sensex Performance (www.moneycontrol.com)

This uncertainty has increased due to the risk arising from the second wave of COVID attack in India and third wave in parts of Europe. The fact that fatality rates in the new strains are fewer and the pace of vaccination is accelerating in different parts of the world, should provide support to the markets in the short to medium term. The volatility is here to stay for some time.

So what should a retail investor do in the current scenario. Book some profits, or stay invested or use this opportunity to accumulate stocks.

Legendary American investor Warren Buffett once famously said it is wise to be ‘fearful when others are greedy and greedy when others are fearful’. This should be our lighting guide when markets are tumbling.

People who followed Buffett’s advice, stayed invested and / or added quality stocks in their portfolio during the market crash induced by the pandemic last year have made handsome gains of up to 100%.

Many investors who have been left out in this rally in the past 12 months, have been waiting for a correction to get in.

There have been four instances when markets have doubled in the last 15 years - July’06 to Dec’07, Dec’08 to Sep’10, Dec’11 to Feb’15 and Mar’20 to Mar’21. We have compared the performance of various sectors against the benchmark index (Sensex).

First of all for the first time, the current rally is more broad based as compared to earlier three times. Hence, not a single sector has registered 2.5x or above growth compared to earlier 3 cycles.

Out performers (green) and Under performers (red)

Source: www.bseindia.com, Proprietary Calculations

Barring the underlying theme driven rally in most of the cycles, Banks always have done well (more than 2x of the index) except in this cycle (~1x the index).

Given the fact that legacy issues are getting addressed with more and more cases getting resolved through IBC/ NCLT, incremental NPAs being lower, growth coming back, creation of a Development Finance Institution and government thrust on infrastructure spend, this sector could outperform.

Consumer discretionary stocks have also slightly underperformed compared to the last time due to lower disposable income this time as compared to previous cycles.

If one looks at the current theme sectors — health, IT, consumer durables, FMCG — then most of these sectors have underperformed. If 2.5x is the benchmark for top sectoral performance, most of the good quality stocks under these sectoral indices can rally at least 40-50% from current levels, while FMCG stocks can double.

Hence, we think good quality stocks from FMCG, banks, healthcare, consumer durables sectors should be bought in dips, accumulate some amount of these stocks at every decline of say 2% or 1,000 points.