Article

5 Reasons to Start Investing When Economy is Weak

19 Sep 2019

The equity bull rally between 2003 and 2008 and the subsequent crash were classic lessons in the art of investing. Most investors turned cautious when the Sensex touched 10,000 in 2006. From that point, the Sensex doubled by early 2008. The subsequent crash was really revealing. The sub-prime implosion and the fall of Lehman were big events and investors had lost their confidence in the markets. By March 2009, most investors had exited altogether. From that point, the Sensex almost rallied three-fold and recouped the previous highs by late 2010. Similarly, investors had gotten overly pessimistic during mid-2013 and early 2016. These were the levels from which markets doubled in a short span of time.

In a way, that is repeating in 2019. The sell-off is nowhere close to what we saw in 2008 or even 2013. But if you leave out the top 10-15 stocks, the damage across the universe of stocks is fairly deep. The question is whether one should wait in the sidelines or look for bargains. Remember, the weakness is not just in the markets but also in the macro economy.  Growth is faltering, profits are hardly growing, industrial output is stagnating and the rupee is under pressure. Are there reasons to start investing now?

1. Economic weakness offers the best stock bargains

Most of the auto sector blue chips are 40-50% down. At the end of the day, people are not going to stop buying cars. India is still a country where private transport has a huge potential and the Indian auto industry is only at its cusp. Another instance is the FMCG sector. The stocks that were quoting at rich valuations are now available below their historical average valuations due to uncertainty over growth. The downgrade in growth has led to P/E ratios of most companies compressing. Both autos and FMCG are a strong play on the India consumption story. You really cannot go wrong on that. Make the best of the lower valuations brought about by economic weakness.

2. You are poised to play the turnaround

If you look at the period before 2003, the signals were quite clear. Money was tight and interest rates were too high. That was making most companies unviable. Things changed between 2000 and 2002 when the RBI went on an aggressive rate cutting spree. The expansion mania was back, companies were adding capacity aggressively, the government was investing heavily in infrastructure etc. In short all the triggers were there. Today, you actually find these triggers and the game is all about playing the turnaround in growth. Low growth periods and pessimism offer the best opportunity to ride the turnaround.

3. You can adopt a phased and systematic approach to investing

One of the reasons for advocating a systematic or phased approach is that when the economy is weak, stock prices tend to consolidate for a long period of time. It is during this interim volatility that you can make the best of your systematic approach. We all know that phased investing gives the benefit of rupee cost averaging. But the problem is that phased approach may not look very smart in a raging bull market. This period of consolidation is the best time to embark upon a systematic accumulation strategy.

4. What was good at 100 is certainly good at 50

Let us begin with a caveat! You cannot apply this rule to a stock like Dewan Housing or Cox & Kings. These have larger fundamental problems. This is more about our unwillingness to buy a great stock at a great price. As Peter Lynch said, “It is a tragedy that investors do not treat an equity bargain sale like any other bargain sale”. We tend to believe that a stock is good only if it is available at a high price. Good quality at a great price is an opportunity you typically get when there is economic weakness.

5. Use economic weakness to diversify your portfolio

Lastly, economic weakness should also be used to diversify your portfolio. This is not just about returns but more about reducing your concentration risk. For example, your portfolio may be low on commodities. The Chinese slowdown has made most commodity stocks very attractively priced. Until now, you may not have taken an investment view on such stocks. But if it adds diversification to your portfolio, then it is worth the effort.

Bad times offer salivating opportunities and it is not just about returns. Weak macros are too good an opportunity to be missed.

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5 Reasons to Start Investing When Economy is Weak

19 Sep 2019

The equity bull rally between 2003 and 2008 and the subsequent crash were classic lessons in the art of investing. Most investors turned cautious when the Sensex touched 10,000 in 2006. From that point, the Sensex doubled by early 2008. The subsequent crash was really revealing. The sub-prime implosion and the fall of Lehman were big events and investors had lost their confidence in the markets. By March 2009, most investors had exited altogether. From that point, the Sensex almost rallied three-fold and recouped the previous highs by late 2010. Similarly, investors had gotten overly pessimistic during mid-2013 and early 2016. These were the levels from which markets doubled in a short span of time.

In a way, that is repeating in 2019. The sell-off is nowhere close to what we saw in 2008 or even 2013. But if you leave out the top 10-15 stocks, the damage across the universe of stocks is fairly deep. The question is whether one should wait in the sidelines or look for bargains. Remember, the weakness is not just in the markets but also in the macro economy.  Growth is faltering, profits are hardly growing, industrial output is stagnating and the rupee is under pressure. Are there reasons to start investing now?

1. Economic weakness offers the best stock bargains

Most of the auto sector blue chips are 40-50% down. At the end of the day, people are not going to stop buying cars. India is still a country where private transport has a huge potential and the Indian auto industry is only at its cusp. Another instance is the FMCG sector. The stocks that were quoting at rich valuations are now available below their historical average valuations due to uncertainty over growth. The downgrade in growth has led to P/E ratios of most companies compressing. Both autos and FMCG are a strong play on the India consumption story. You really cannot go wrong on that. Make the best of the lower valuations brought about by economic weakness.

2. You are poised to play the turnaround

If you look at the period before 2003, the signals were quite clear. Money was tight and interest rates were too high. That was making most companies unviable. Things changed between 2000 and 2002 when the RBI went on an aggressive rate cutting spree. The expansion mania was back, companies were adding capacity aggressively, the government was investing heavily in infrastructure etc. In short all the triggers were there. Today, you actually find these triggers and the game is all about playing the turnaround in growth. Low growth periods and pessimism offer the best opportunity to ride the turnaround.

3. You can adopt a phased and systematic approach to investing

One of the reasons for advocating a systematic or phased approach is that when the economy is weak, stock prices tend to consolidate for a long period of time. It is during this interim volatility that you can make the best of your systematic approach. We all know that phased investing gives the benefit of rupee cost averaging. But the problem is that phased approach may not look very smart in a raging bull market. This period of consolidation is the best time to embark upon a systematic accumulation strategy.

4. What was good at 100 is certainly good at 50

Let us begin with a caveat! You cannot apply this rule to a stock like Dewan Housing or Cox & Kings. These have larger fundamental problems. This is more about our unwillingness to buy a great stock at a great price. As Peter Lynch said, “It is a tragedy that investors do not treat an equity bargain sale like any other bargain sale”. We tend to believe that a stock is good only if it is available at a high price. Good quality at a great price is an opportunity you typically get when there is economic weakness.

5. Use economic weakness to diversify your portfolio

Lastly, economic weakness should also be used to diversify your portfolio. This is not just about returns but more about reducing your concentration risk. For example, your portfolio may be low on commodities. The Chinese slowdown has made most commodity stocks very attractively priced. Until now, you may not have taken an investment view on such stocks. But if it adds diversification to your portfolio, then it is worth the effort.

Bad times offer salivating opportunities and it is not just about returns. Weak macros are too good an opportunity to be missed.