By Manish Jain
The second wave of Covid-19 hit us like a tsunami. However, the good thing is that just as quickly as it had risen, it seemed to be ebbing. However, a large part of the country has been reeling under lockdown and surely there would be an adverse impact of the same on earnings and economic growth. Combine that with the rising global commodity prices, fueling inflation concerns, and it makes for a potent combination.
The key question that comes to mind is, why are the markets rising the way they are? Are we all missing something or are the indices priced wrongly? Are we in for a sharp correction? The second question as an investor is – what should be the investment strategy now at these levels?
Taking one step at a time. Why are the markets in such a robust shape? We believe here are some of the key reasons:
A) Forward-looking view: While we as human beings wait for a situation to play out and often judge it by the present circumstances, markets are always forward-looking in nature. It is here that we as investors often go wrong. While the second wave may have hit us hard, the point is that it is ebbing fast and shall be soon a distant memory, leading to a massive V-shaped recovery.
B) Human vs economic impact: While the human impact of the second wave has been quite tragic and catastrophic, our belief is that the economic impact will be limited. Essential services, manufacturing industries and supply chain all continue to work quite well. Our sense is that India’s GDP growth can still clock in a good 11% growth in FY22, hardly a couple of points shaved off the top. This in itself is quite a reason to cheer.
C) The K factor: While small traders and MSMEs are definitely going to be impacted, the market and category leaders shall remain largely unaffected. They shall not just survive but thrive, gaining market share from unorganized players, but also smaller organized players. So, invest in quality “Good and Clean” companies and you have a winner at hand.
So while we have established by now that markets are in robust shape and quite logically too, what remains to be answered is what should an investor be doing?
We do believe markets shall remain in a robust shape and hence lots of money-making opportunities in the coming couple of years. However, wise would be a strategy to choose the sectors and companies correctly. We believe consumer discretionary, banks and chemicals are some of the sectors to watch out for. As for the companies that you choose, please look for leadership, balance sheet strength, and all the usual Coffee Can traits.
(Manish Jain is Fund Manager at Ambit Asset Management. Views expressed are the author’s own.)