Advice to investors: 'Stay away from lure of short term gains'

'Stick to the known quality names, avoid short term thinking and don't be in a hurry to book profits on your winners.'

Vinay Khattar, Head, Professional Investor Research, Edelweiss, who moderated the Emerging Ideas Conference 2020, organised by Edelweiss Wealth Management, discussed the key takeaways from the conference, why he thinks equities could stage a strong rally before a correction sets in and explains the reason behind the sharp rally seen since March 2020 lows.

"It is best for most investors to participate in the markets through mutual funds and PMS (portfolio management system). Stock markets appear simple, but are fairly complex. Hence, while investing it makes sense to stick with professionals," Khattar tells Prasanna D Zore/Rediff.com.

What were the interesting investment ideas that came up during the Edelweiss Ideas Virtual Conference?

A key takeaway from the conference was that the economic recovery post the pandemic has been better than anticipated and has surprised positively. This commentary was consistent across companies, across sectors and most of the managements that we hosted were very optimistic on the near term outlook.

Rising food inflation, a good monsoon, absence of major floods and strong government thrust have led to a very good recovery in the rural regions. So we remain positive overall in the agri, rural and allied sectors.

Another interesting space where we expect to see a lot of traction is the insurance companies. Post the initial set back in the first quarter, the insurance companies are making a strong comeback, with increasing thrust on direct sales. They are very well poised to post a sustainable long-term growth.

What are the investment lessons for foreign as well as domestic institutional investors?

The greatest investment opportunities come when great companies face unusual short term circumstances. This is one very big lesson that COVID-19 has taught for the investing ecosystem.

When times like these arrive, the business gap between the great companies and the average companies keeps widening.

Such times are the stock-picker's heaven and the most opportune moments for loading up on quality names.

What would be your advice to investors so far as their risk management about investing directly in stocks is concerned?
How can they maximise their profits while also ensuring their capital is not eroded when they think of investing directly in stocks?

The best risk management technique for new retail investors is to stay away from the lure of making short term gains in unknown or low quality names.

More often than not, you'd end up making gains on 2-3 of them and lose double of that in one wrong bet.

Stick to the known quality names, avoid short term thinking and don't be in a hurry to book profits on your winners.

As they say, cut your losses short and let your winners run.

But beyond this advice, it is best for most investors to participate in the markets through mutual funds and PMS (portfolio management system). Stock markets appear simple, but are fairly complex. Hence, while investing it makes sense to stick with professionals.

How do you see the economic recovery in India shaping up now that we have just begun our climb up from the COVID-19 abyss?

While there is no denying that headline growth numbers will look upwards hereon, partly aided by recovery and partly by extremely low bases, one needs to be cautious of the pre-COVID-19 structural issues that still need support.

The high frequency data points that the current recovery is tiptoeing on underlying fragilities, as seen in credit growth, export performance, worsening sequential performance PMIs, etc.

The priority for India should be to clock 10-12 per cent+ nominal growth by deep rooted reforms and fiscal stimuli.

Now that crude has once again started trading above $50, is it safe to assume that we are likely to see demand revival globally?

There is some demand revival globally, especially with Chinese numbers surprising on upside, and China expected to grow by 2.1 per cent in 2020.

The uptick in crude was also a function of general risk on sentiment that prevailed in November -- with (US President-elect Joe) Biden's victory and potential vaccine developments.

However, my sense is that crude prices have already pegged in the demand revival and are likely to be range bound with some upwards bias.

The global stock markets have rallied quite smartly from their March 2020 lows. Is the worst behind us? What are the fundamental reasons for this rally?

If we speak of levels, the worst is definitely behind us. However, I will not rule out a shallower correction in stock markets.

By most fundamental and technical indicators, markets are currently overstretched. Therefore, a correction from 13500 levels is on the table.

The rally, however, was driven by anticipation of markets which saw the V-shaped recovery much before the hard data revealed.

Earnings surprised on the upside but the caveat remains that they were largely driven by cost cuts.

The global monetary stimulus and lower rates warranted for an uptick in valuations. These fundamental reasons have largely played out in the current rally.

As a wealth management company, what are the asset classes and sectors you are recommending to your clients?

We continue to be driven by asset allocation approach -- specific to client's own needs and risk appetite.

We generally allocate between equity, debt and gold but also hedge the currency to maximise returns and minimise volatility.

For an investor with a moderate risk appetite, we are recommending a 45 per cent exposure to equities, 35 per cent to fixed income and 20 per cent to other asset classes like InvITs, REITs, etc.

In equities, we continue to stay positive on automobiles, FMCG, large private banks, cement, speciality chemicals, IT and metals.

Do you think given the sharp cuts we saw in the stock markets, once the economic upturn sets in, equities as an asset class will outperform other asset classes?

Equities, being a riskier asset classes, will perform better when the growth comes back.

Though closing of liquidity taps by central banks will weigh on its prospects eventually, we believe that equities have a bull run ahead of them, before that plays out.

What will be your top picks for 2021? Also for the next five years?

Among large-caps, our top picks currently are Infosys Limited, ICICI Bank, HDFC Limited, Asian Paints, Titan and Pidilite while among the mid-caps our top picks are Mindtree, Cholamandalam Investment Finance, Navin Flourine, Ashok Leyland and JK Cement.