It’s A Buyer’s Market, Create A Diversified Portfolio, Says Motilal Oswal’s Raamdeo Agrawal

It’s a buyer’s market, a good time for investors to start nibbling at equities, according to veteran stock picker Raamdeo Agrawal.Unfortunately, the asset manager’s cash is fully deployed but for those who have managed to keep some aside “this is a good time to step in”, Agrawal, chairman of Motilal Oswal Financial Services, said in an interview. But he cautions further correction cannot be ruled out.The Indian equity benchmarks plunged 10 percent in early trade on Monday, triggering a 45-minute trading halt for the second time this month. The indices have tumbled 37 percent in the last month, tracking a global selloff, as authorities first restricted services to thin crowds and finally ordered lockdowns in much of the country to check the spread of new coronavirus pandemic.“No one can get the bottom, absolutely... Staggering your bets is the only way you can get some kind of a sensible entry into the market,” Agrawal said..This is a quarantine exercise. This is removing poison from the market worldwide. Once this poison is removed, you’re good for the next ten years. The issue is, do we have the courage to enter right now?Raamdeo Agrawal, Chairman, Motilal Oswal Financial Services..For those brave enough to enter, Agrawal has one advice, “Make a diversified portfolio of good companies”. He said being in the market, even if it is through a benchmark index, is more important than trying to identify the leader of the next bull run..Watch the full interview here....Here are the edited excerpts from the interview:.When people announced buybacks, they believed that there is not just the business sentiment that is pricing in rock bottom but also economic sentiment that might come about. You have done this. Is this a sign that you believe that the prices are factoring in the worst?Yeah, I mean, if it has factored in the days to come. More clearly this reminds me of my experience in 2008-09 and in 2000 and 1992. So, I have seen in my 35 years, this size deluge, in the sense that the corrections of this type, which is once in a decade kind of situation, and in second again this is the one and we are facing right now. So, clearly the price and value correlation will break down in the sense that price will go well below the underlying value. The value is best understood by the owners of the businesses. When we say we will pass a buyback resolution, it’s an enabling resolution because you cannot just go and buy back your shares. So we have enabled resolution. Unfortunately, there is a 20 percent tax. So, I can pay 20 percent lower price than the price I could have paid otherwise. So anyway, I think now, starting in all the companies I think you’ll see price definitely touching value, and probably even more than value..How are you determining this value Mr. Agrawal, and just not just for your company, but I’m just asking market-wide, because when these dislocations happen and I’ve heard a lot of people say that this is something that is a bit of an unprecedented event because we don’t have a template for this in the past, at least in the last 20 years. So how are you judging what’s happening in the market right now and what could happen to economy and markets in the next three months?No, there is a template in the sense that this is not about coronavirus, or lockdown or anything like that. This is about the fear and fear as I said three times; I mean like in 2008, there was a massive fear about the world coming to an end because the global credit crisis and mortgage crisis in the U.S. So, of course, the reason underlying will be different. In 2000, it was the Dotcom burst, in 1992 it was the Harshal Mehta collapse. So these things do happen and that the framework is that of how do you handle fear? Because there are only two emotions in the stock market—greed and fear. Right now, clearly market is in the grip of intense fear. Can it become even more intense? That’s a unknown territory. Now you can go by what has happened in the past and worse has been in 2008-09 when it went down by 65 percent. Again, even now valuations were almost same as that was in 2008-09. The U.S., the mother of all the markets, they are trading it almost 1.8 times to GDP, before the collapse. Everybody was saying the collapse had to happen. Nobody knew what was going to happen because the health reasons, coronavirus, and those kinds of things, but ultimately, the impact is not because of the coronavirus fear. It is about the second impact that is the impact on the businesses and the damage to the franchises or the business per se. That is a fear in the stock market. Now, airlines are shut, hotels are shut, tourism is shut. Now all the automobile companies are shutting down. So, I mean, of course, this is for two, three months or maybe a few weeks here and there. But the share market is an extrapolating machine. The market says I don’t know what is going to happen next month or month after that. It is for the investors to figure out. But today I’m extrapolating whatever is happening now, well into the future. That happens in optimism of greed, and that is what gives the greed and right now no downtown is being extrapolated. So that is out of fear..You reckon Mr. Agrawal that concurrent demand and supply shocks can actually take the prices lower? In 2008 in that sense was it slightly different than what the current situation is? Or do you believe it’s an apple to apple comparison?No, no, no. It is never an apple to apple comparison; particularly the backdrop against which it is happening is very different. One, there is a huge social media; you are in a minute connected to the world. In 2008 also, you were connected. But now, more so with WhatsApp, the internet, internet on the phone. I think there is no big difference between whether you are in the U.S. or here. You’re just talking to everybody. So, seamless, global connectivity, the social media around that’s a big difference. Second is a reason underlying in a sense that, that time it was a prudent collapse. It was a straight business issue, banking issue. This time it started with the health and now the health is giving birth to business issues. If there was only coronavirus and the world was functioning. The crazy thing about coronavirus is the solution which is found is the most primitive; there is no vaccine or there is no antidote. So they’re saying that just lockdown the whole world, not even city. You might have seen, China was locked down. Still, we made a new high in the world and the U.S. made a new high, despite China was locked down when it started spreading to Iran and more particularly Italy, Europe. When it started knocking on the door of the U.S., then all hell broke loose. So it’s all about fear of the end of the world. Behind that what is the story, that will always be different of course..The foreign flows, which are well going out, will they take a really long time to come back, whenever this issue ends? India too, in all probability will see economic dislocations. We don’t quite know how worse this situation will get in India. For now it’s contained, but we don’t know if this will spread.Let me tell you the stock prices are not made by a buyer or seller, because for every buy there is a seller and for every sell, there is a buyer. The colour of the buyer and seller could be different. If FIIs are selling, the companies are buying, HNIs are buying, domestic mutual funds are buying, licences are buying, and insurance companies are buying. So there are always buyers and sellers. The stock price goes down despite buyers and sellers being equilibrium is a fact that there is an opinion- a negative opinion. So today’s opinion will make today’s price, tomorrow’s opinion will make tomorrow’s price. The world is fearful today and we don’t know whether tomorrow it will reverse but it will reverse for sure one day, I don’t know what day is that. I’m quite sure there’ll be two or three temporary up circuit and you will not get the stock. I mean you bring all of them- the FII money, domestic money but you will not get the stock. Today, you ask for 100,000, you get a million. So, today it isn’t the seller but it is the buyer’s market. At some point of time, it will completely be a seller’s market. So, the best time to buy is when it is a buyers’ market and it is a deeply buyers’ market. If you know the underlying value of the company that okay, if I’m running any company and say, Motilal Oswal. I have the benefit of having a company which is listed, but please don’t take it as anything. I’m just giving an example. My company’s own book value is set to Rs 230. Now, the stock is quoting at about 500 or whatever I don’t know I have not seen the price today, but it might be putting up some price. Now, what is the underlying value and what is the franchise value? This means, what is the earnings power of the company? For any company irrespective of the name, I think what on a network it can earn- if you keep it simple; if it can earn, say, risk-free 10 percent, I would say price to book one. If a company and even after, I’m quite sure, Corona is not the end of the world. In three months, six months..You are comparing this one to the earlier templates, that the reasons may be different, but the impact and the eventual outcome typically remains the same. Is that how you are observing the markets right now as well, that we don’t know the time at which it will reverse but this might be a good time to start out investing?Yes. What I’ve seen is that right now, because my style is 100 percent remain invested, but it is not the best thing at this point of time. I don’t have any cash. So I’m just frozen and am staying tight in terms of what quality of portfolio I have to build. I think the people who have somehow- who’ve been successful in cashing out at a little higher level or they have a fresh inflow for some reason they’ve sold businesses or somehow they’re sitting in cash, there’s a time to start in a buyers’ market, some amount of money 20 percent, 25 percent, 10 percent depending on what is the risk appetite, they should step in. I’m quite sure the moment you buy; there could be further vertical reduction. If market has to correct by 50 percent or 60 percent, there could be some more way of correction but nobody can get the bottom, absolutely. So today could also be a bottom you never know. So, we should not miss any of the possibility. If it is a 25 percent chance that today is the bottom, so we should at least have 25 percent of the money in the market. So I would say that staggering your bets is the only way you can get some kind of what I would say, a sensible entry into the market and in cash on buyers’ market, and I’m quite sure from buyers’ market, it will be a completely seller’s market. I hope it gives some time. But I wouldn’t be surprised if it rapidly becomes a seller’s market at any point of time..Just wondering, the previous leaders of the previous bull run don’t necessarily become the leaders of the next bull run. Is that how you’re seeing this template as and when we revisit it? I mean whenever the recovery starts.Yeah, so I would say the leaders in the businesses, forget about the stock market for the time being, I think leaders in businesses will remain leaders are the businesses. Now, where is the loss in the market? If a great banking company has lost 50 percent value from the top and say not so great a banking company has lost 80 percent, I would definitely at the bottom bet on the company A, which is a fantastic franchise; it is very difficult to create those kinds of franchises. They’re not created in a day. But because of the stress in the situation right now, let me tell you one thing, this particular thing, this phenomenon is happening once in 10 years, and this is definitely once in a 10 year phenomenon. It happened in 1992. It happened in 2000, it happened in 2008 and now this happened 2020. This is a quarantine exercise. This is removing the poison from the markets worldwide. Once this poison is over, you are good for next 10 years, you’re quarantined for next 10 years in the market and you will make money one way forward. The issue is do we have courage to enter in right now? Now what do you buy is not functional. Don’t try to be speculative in the sense that which is going to be data of the next bull market and those kinds of things. Right now, what is important is to put your money in the market, even in index, you know, Nifty index, which is not about a stock or something like it’s a broad market, but enter into the market. Right now 5-10 percent 20 percent, as is, as we said, is staggered. So being in the market is more important that will get you 90-95 percent of the returns. The rest depends on how smart you are in terms of picking a stock that will definitely play out. But I would suggest that being in the market that is most important and if you are not competent to select a stock, which is the best talk and frankly speaking, nobody knows what is the best stock right now. It is better to have a diversified portfolio of good components. So, portfolio strategies don’t change that much as much as the allocation strategy changes right now..What’s the challenge to this thesis? Do you reckon that responses from the government, from the Reserve Bank in a quick fashion are the need of the hour? If they get delayed and they hamper a smooth functioning of credit for businesses, etc., that might also create a problem?Of course, I mean, a house is burning and fire tender has to come now, I’m going to say it after a few hours, and the house will be gutted. So I think bigger European, American central banks, Chinese central banks, they have responded very appropriately. Indian central bank authorities, they are very aware of the situation. It’s a very complex situation because we are an emerging market economy, a large emerging market economy, we don’t have the flexibility that developed economies have. More particularly, on the forex front. Apart from all the problems, we have a forex problem in the sense that you cannot allow the rupee to just go haywire. So, I think that would be his first priority then second is the liquidity. I think they have seen to it that liquidity is there in the system, whether the rate is 6 percent of five and a half, I don’t think that really matters that much. So, I think they are quite aware of the situation and they are willing to act - they are acting. So, I would say that will be a very material thing, what kind of fire tender or what kind of a response you get from your monetary authorities. Fiscal, I think the orthodoxy or some kind of earlier held beliefs that my system deficit should be only this much or that much. I think there should be thought leadership here. That is what is most important. Thought leadership at this point of time, how do you fight the crisis? Now you need the best talents and best thought leadership.

It’s A Buyer’s Market, Create A Diversified Portfolio, Says Motilal Oswal’s Raamdeo Agrawal

There might be more correction, so Raamdeo Agrawal advises a investing in a staggered manner into the market.

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