The best investments are made in the worst of times provided one has the mental and the financial strength to see some drawdowns in the portfolio.
Equity derives its price/value from increasing earnings of companies, but the earnings power of companies come down in a slowing economy. The longer the coronavirus takes to peak out, the longer it will take for the economy to recover.
Rarely in human history has the equity markets corrected with the intensity it has over the last month or so. And to put the carnage in perspective, Nifty is down 32% and Nifty Midcap 100 Index is down 33% since January 1, 2020. And with this, Nifty is back to the same levels where it was five years ago and Nifty Midcap 100 Index is lower than where it was five years ago. And we all know that equity markets or an individual company’s stock prices should move in line with their earnings growth in the medium to long term.
So does this mean the earnings for these companies has remained same what it was five years ago? The answer is obviously no, hence the current stock prices seem very attractive. Equity is a wonderful asset class which one can evaluate, unlike something like real estate, gold, etc., where it is very difficult to value.
Currently, Nifty trades at around 15 times trailing 12 months earnings and this has been the most attractive since August 2013. The markets look very attractive. As the Covid-19 pandemic is not an usual financial crisis, it is very difficult to work out the exact timelines of recovery. It is impossible to say whether we are at the bottom ans it is always very difficult to catch the bottoms.
So, depending on one’s risk appetite one can increase the allocation to equities as and when certainty on Covid-19 containment increase. An investor who is willing to experience short term uncertainty for longer term rewards could increase allocation. Also, for someone who has a very low equity allocation, it looks to be a good opportunity to increase allocation.
An investor should not forget that the best investments are made in the worst of times provided one has the mental and the financial strength to see some drawdowns in the portfolio.
(The writer is fund manager at Motilal Oswal AMC)