Blogs from Capital Portfolio Advisors
  • April 3, 2021
  • Paras Adenwala
  • 8

Dear Patrons:

Financial year 2020-21 has come to a close. What a year it has been! The year could easily supersede the best of the roller coasters anyone could have experienced. Post the identification and announcement of Covid-19 in the last week of FY20, most countries reacted with lockdowns of varying magnitudes. India too had a major lockdown, with the first quarter of FY21 being a washout, evidenced by most businesses being shut. Essential businesses were allowed to work, but, they too worked at half-mast with several of their employees working from home. Consequently, markets too went into a tailspin immediately after the lockdown. However, there was a surprise in store for most investors, as the markets begun recovering quickly from mid-April 2021, with international investors ploughing their dollars into key global markets, including India. This strong recovery in the markets converted itself in a complete change in sentiment leading to the Nifty drawing to a close at the end of FY21 with a 71% gain and the Nifty Midcap Index gaining by a whopping 115%.

During this period of uncertainty and tremendous inconvenience, which still continues in a diluted form, we bounced back strongly. Until the end of Q2FY21, several businesses while continuing to function guided for a hazy immediate future, with some indicating seeing green-shoots. From Q3FY21, the economy gained momentum, with most businesses back in the fray. As we write this communiqué, IMF has estimated the GDP growth of India to be in excess of 10% in FY22, the fastest growth rate for any major emerging economy.

While Covid-19 has impacted several businesses, it has opened up opportunities for many newer segments. Sectors like tourism, multiplexes, luggage, offline retailing, etc. have been impacted. Sectors like home décor, consumer durables, real estate (non-urban), consumer durables, personal mobility, online education, etc have benefitted. Globally, manufacturers are reducing their dependence on China and creating newer non-Chinese vendors. This has opened up numerous opportunities across sectors like specialty chemicals, pharmaceuticals, mobile manufacturing, textiles, auto ancillaries, etc.

As most investment professionals would do, we had to change our portfolio strategy to protect the portfolios from the carnage that followed the announcement of the pandemic. We maintained a defensive posture for a while and made suitable alterations in the strategy, post phased opening up of the economy. This defensive posture did impact the portfolio performance for a while.

In the initial phase of the market recovery, consumer staple stocks did well, along with pharma and IT, as is usually the case, when the market sentiment turns weakish. However, with most governments pumping in huge liquidity in the economy, a large part of this incremental injection made its way into various asset classes. Equity and bonds did very well, with commodities and real estate catching up later. The resilience of the Chinese economy gave a fillip to metals. Sectoral preferences of investors have changed in this cycle of bull markets, with cyclicals outperforming the defensives and midcaps/small caps doing better than the large caps. In that sense, most investors are in a risk taking mode. The primary market is on an overdrive, with several existing and new companies in a fund raising mood. However, most IPOs/OFSs are priced at valuations that are unpalatable, to say the least!

Given this backdrop, our portfolio strategy would continue to keep on “buying growth at value prices”. While our bias continues to be in favour of businesses that are predictable, with basic quality parameters being in place, we may consider buying into cyclicals and increase exposure to midcaps/smallcaps, which to this day is small. Valuations for many large caps seem to factor in growth for FY23. With a broad based economic recovery underway, earnings could surprise investors in the mid and small companies. Valuations seem to be attractive here, despite the sharp rise.

While the sentiments in the markets have turned optimistic quite distinctly as opposed to last year, there are some risks that are worth highlighting. A combination of a pick-up in demand and an ocean of liquidity globally, risk of inflation is paramount. Bond yields resultantly have begun spiking in most bond markets. This is unnerving institutional investors. It is also an indication that interest rates have bottomed out. Cost of doing business has begun to inch up. Inflation in commodity prices, could pressure profitability of several user industries. Continuing supply chain issues could impact several businesses. While FY22 would show a high growth due to a low base last year, growth rates in FY23 could moderate due to a high base of FY22. India like some other countries, is facing resurgence of Covid. If lockdowns come back, economic growth could be impacted. Valuations are not as cheap as they were last year. Hence, the need for experienced stock pickers, from here on, cannot be over emphasized!

As we draw to a close, we are excited about the prospects of the Indian economy due to a large domestic consumer base and the government’s resolve to make India a self-sufficient economy and a global manufacturing hub. The markets may consolidate for a while after the sharp rise, but, the trajectory is expected to be in line with the prospects of the economy. Investors investing with a long term horizon would capitalize from the immense opportunities that India provides, despite the intermittent speed-breakers.

Stay happy and healthy! Stay invested!

Best wishes,

Paras Adenwala

8 comments on “1st Annual Letter to Clients

  1. Very well analysed and explained Paras . To the point and one gets a very clear view of the economy and times to come and what is in store . Crude prices would be closely watched by the market players as it affects the Indian economy quite a lot . Regards
    Sanjay

    1. Thanks for your comments. Appreciate!

      You re right. The state of Indian economy depends quite a bit on the level of crude prices. However, we do believe that over th next decade this dependence should reduce, as the tilt towards alternative energy resources gains momentum.

  2. Very well written! One of the most turbulent times explained in a very simple and lucid manner. Look forward to more such interesting posts. Regards

  3. Very good analysis of the past year and challenges faced. The coming year too is full of uncertainties due to the Pandemic. But the growth story is intact. Your views and comments on the right Stock picking and Valuations is highly appreciated always. Thank you Parasbhai.

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