Equity Market: Change is the only permanent thing

Equity- Equity Market

EQUITY MARKET 2020

Summary

The past 5 weeks have been the most horrific period for investors in financial since the five-week period in September-October 2008. Colossal destruction of investors’ wealth has already taken place. EQUITY

There is an argument that this destruction is only a notional mark to market (MTM) loss if the investors continue to hold the securities, as the prices will certainly recover as soon as the COVID-19 is contained; maybe in 3-6 months. The proponents of this view are cautioning the investors that selling the securities at this point in time will convert the temporary MTM losses into permanent erosion in wealth.

On the queries raised by the investors  our view on this topic is as follows:

We believe that the market cycle in India that started in 2013 has definitely ended. Historically, the sectors and stocks that lead a particular market cycle, are not found to be leaders of the subsequent market cycle.

Commodities in the early 1990s, financials in the mid-1990s, ITeS in the early 2000s, infrastructure in the late 2000s, and consumers in the past five years are some examples. Many star performers in these cycles (Andhra Cement, SAIL, VLS Finance, IFCI, IDBI, DSQ Software, Pentamedia, Suzlon, BHEL, Reliance Infra, JP Associates, etc) did never recover their losses. Irrespective of the fact whether the investors sold these stocks during panic periods that marked the end of respective market cycles or held these stocks for many more years, their losses have been permanent in nature. In fact, holding these stocks longer has only exacerbated the losses.

In our view, we would need to distinguish between the investors in mutual and investors who like to invest in securities directly.

Ideally, those investors who have invested in a mutual fund should not be worried, because the professional fund managers managing their money must recognize the need and time for a change and adjust the fund portfolios accordingly. For example, most mutual funds today are not holding stocks of ADAG, JP Group, Suzlon, etc. Most of them would have sold the embattled Yes Bank, Vodafone, Zee Entertainment, etc. also. By not redeeming these mutual funds during panic bottoms, investors may hope to recover their temporary MTM losses in due course.

However, this may not be true in the case of individual investors, who refuse or fail to effect necessary changes in their security holdings with the changing times. From my experience, I know that many investors are still clinging on to the stars of previous cycles, which have become duds with almost no chance of recovery. For such investors, not selling during times of panic may actually result in higher permanent losses.

It is also important to note that not selecting a good mutual fund manager may also result in MTM losses becoming permanent losses. A fund manager who is not dynamic and pragmatic enough to read the economic and market trends quickly may remain saddled with the non-performing assets for long, thus causing material permanent losses to the investors both in terms of erosion in portfolio value and opportunity cost.

Personally, I would therefore not buy or keep holding something just because it has fallen 50-60% from its recent highs. The portfolios of mutual funds will definitely adjust as per the times because I am confident about the quality of my fund managers. My direct equity and debt holdings, I have already changed.

Author: Midas Finserve

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