The Next Billion-Dollar Opportunity
In the previous part of the series, we looked at how the pandemic has destroyed the world economies. Concerning economics, we are in a proper recession. However, there is a sharp connection between economic data and the stock markets of the world. This has puzzled analysts across the globe.
Some of the analysts think of it as a ” once in a decade opportunity” while some think it like a “Dead Cat”. We will not engage in the exercise of debating whether the market is right or wrong in its bounce. Instead, let’s try to identify the core factors of the rally and how you can use this opportunity as a long term gain in the future.
To begin, you can look at some of the factors fueling the current market rally. These factors are:
- Discounting Mechanism- Most of the theory believes that the stock market works on a discounting mechanism. All the future events are priced at the present value. The recent rally can be an indication that the market is pricing based on economic recovery post-COVID-19.
- Liquidity– Liquidity is probably one of the biggest reason for this rally. The Fed increases liquidity in the market as the amount of money printed in the last six months is more than the amount printed in the last 108 years. The effects of this money printing are being felt across the globe, including the Indian market.
- Optimism– The recent hike in the jobs data shows that economy is rebounding. There is a wave of confidence among the investors as a specific set of economic data showed a green signal.
The above factors are related to the broader market. Some sectors that were drowning six months back, now performing extremely well. These sectors should be on your radar for long term capital appreciation. The winners of the previous bull market don’t have to necessarily lead the next bull market.
With this philosophy, we identify the following sectors:
- Pharmaceuticals– It’s an all-time favourite sector for most investors. The pharmaceutical sector leads to price erosion because it was caught in headwinds of regulatory pressures in the critical market of US. However, the regulatory environment seems to be stabilizing. There are indications that it could be the start of a new bull run in the industry. Selecting companies with strategic advantages in key geographical areas are the key to higher returns in the sector.
- Automobiles– The automobile sector was in a structural slowdown since 2018 due to uncertainty regarding the BS-VI transition. The industry is likely to make a comeback due to a fresh start of the CV cycle and renewed buying of BS-VI vehicles. They have the most substantial potential to deliver returns so you might also want to look at it. Companies with dominant market share and innovative management will thrive in this scenario.
- FMCG– This sector can play a defensive role in your portfolio as the demand for consumer goods always remain increasing. To get positive returns in future, it is important to identify companies with a mismatch between perception and the actual reality of the company.
- Commodities– This sector is a classic example of “The best investments are made in the worst times” principle. As an investor, you can look for gains in the commodities cycle and can allocate a specific part of your portfolio to commodity-centric stocks. However, you must have a pre-determined selling point. If you will not set your selling point, all the gains can be wiped out in downturns of the cycle.
- Financial Sector– It is widely observed that there cannot be any growth without the banks. If you want to take advantage of the growth, the financial sector is an important sector to invest in. However, you must assess whether the company you are choosing is likely to survive the recession or not. and critical analysis, you can simply stick to the market leaders in banking and NBFC space to avoid such confusion. This can lead to steady, superior returns in the future.
Apart from the sectors that mentioned above, you can see the opportunity in the next bull market:
- Technology – The pandemic has made it clear that technology is now a utility, just like electricity and telecom. As a growth-oriented investor, you cannot ignore technology while screening companies for your portfolio.
- Gold – With massive money printing, the US dollar continues to be healthy and it isn’t going to depreciate against Euro or Yen. So can it devalue gold? You should take the benefit from this scenario considering it as an opportunity. You can allocate a certain part of your portfolio towards gold.
- Emerging Markets – You will see a lot of money moving towards emerging markets as they typically require high commodity prices to do well. Indian investors stand to benefit the most as the inflows in Asia after the pandemic are likely to be focused on India as well.
The liquidity created by central banks across the nations is creating a massive blend in the global equities. The money printing in developed countries will continue until the economy indeed rebounds, and the markets will cheer it every time. The only question that matters is whether you, as an investor will be able to take advantage of the current scenario and build a strategic portfolio to get superior returns in the future.
Coming Up Next – As we move further, we will take a more in-depth look at the trends identified and how retail investors can use these trends in their portfolios to gear up their returns.
By- Akshay Vyas