Is this the much awaited correction or would you say it is too early to call it that?
After such a big rally, to have one day down and call it a correction is a little early. If it does persist on the downside, then yes we would have to look at it as a correction but right now I would just treat it as a blip. That said, one is not arguing for the fact that there is any reason for the markets to continue to rally from here. They are somewhat expensive and internationally also, things are looking a lot more jittery. Inflation is definitely in and is going to be here for a while and the interest rate cycle seems to have bottomed out. All these are not necessarily in favour of stock markets but the markets have been strong.
How do you protect capital right now with high beta names like IRCTC, , IEX and especially the speciality chemical names?
The names you mentioned are all those which had rallied tremendously in the recent past and speciality chemicals of course have a much longer track record of performing very well. I can understand the rally in the speciality chemicals because there is now a fundamental shift because of whatever is happening in China and as a consequence the demand supply situation is very much in favour of the Indian companies. So despite the fact that they are rather pricey in the historical context, one could argue that at least going forward the earnings growth is going to be fairly strong.
For some of the other names that you mentioned, I find it difficult to find the reasons why they would be changing into a new growth trajectory and in that context, to some extent, it was more froth than having any reason for those stocks to be moving up.
That said, even if one puts bullish valuations, many of these companies have had a fairly strong runup. So giving up some percentage there is par for the course, especially if you do see a market which has decided to take a pause for a while.
All market experts have been talking about for how long can you possibly expect a straight line rally and there have to be blips that come in and that is just the way the markets function. Would you agree with that or is the pain going to start now?
I do not think it is very useful as an investor to worry about what the market is doing. One cannot control where the market is going to go and so it can continue to go up or it can fall. One can at most manage one’s own risk return. Therefore, if you think that the market is at a level where it is giving you sleepless nights, reduce your asset allocation. If you think that the market momentum is not likely to be changed, keep your asset allocation tilted towards equity; and if you are really bullish, go ahead and increase it.
The fact of the matter is that different people have different timeframes of investment so generalising in terms of what anybody should do is a little different for people who are just trading the price. It does not really matter what price they are trading for. People who are looking at it on the other extreme are saying we want to try and buy a business. One should be a lot more circumspect about the kind of assumptions one is making — both in terms of being very conservative as well as being overly bullish. It is really a question of individual preferences.
Given that kind of situation, the only one statement one can make with complete certainty is that the higher the near term returns, lesser will be the longer term returns because the higher you climb, going forward your compounded growth has to come down because finally the economy can only grow at a certain rate and that is the only certainty you have.
