Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. If you like this collection, consider forwarding it to someone who you think will appreciate it.
Equity Advisory
Thursday 26 August 2021
Weekend Reading
Reading across disciplines is one of the best ways to improve our investment acumen. Here is a summary of some of the best articles I read this week. If you like this collection, consider forwarding it to someone who you think will appreciate it.
Sunday 22 August 2021
Hit Speak - Time to be Prepared, Not Worried
The markets have continued to follow the same trend of large-cap outperformance versus small and midcaps underperformance that we have seen
for quite a few weeks now. We alluded
to that in our last blog post on 10 August 2021. The frothy rally in the small and midcaps
seen still remains something in the past. Broader markets have yet to find consistent
strength.
The question of how to position ourselves keeps vexing a lot
of investors. Our view remains the same as
before. And that is to be in sectors
that have shown strength/resilience in the past few weeks in terms of price
action. And in companies with strong
earnings visibility over the next few quarters.
Overall our sense is that the small and midcaps space is taking a much-needed breather after the strong and often frothy rallies seen in the past. All this while the large caps are doing their bit to carry Nifty higher.
Some of the pockets that have shown good strength in the last
few weeks have been the index heavyweight large caps. Besides these, FMCG and consumer staples also seem to be
showing good strength. I will be
discussing some interesting charts to drive home our assumptions.
The FMCG index seems to be showing good signs of a strong
breakout. Stocks from this sector have been relative underperformers over the
past few weeks and months. But now most
of them seem to be breaking out/on the verge of breakouts.
Nestle chart has broken out above all time highs.
I would like to have a look at the medium term chart of Reliance Inds. I have put up a GMMA (guppy multiple moving averages chart) weekly chart of RIL. As shown in the chart, we can see a breakout from a flag like consolidation on this chart. If the pattern plays out, RIL can be a big leader going forward and can lead Nifty to much higher levels. Blue lines indicate longer-term moving averages and usually indicate an investor mindset. It offers support during short term market corrections. Red lines indicate shorter-term moving averages and indicate trader mindset. Best setups are those where longer term moving averages are consistently moving up and shorter-term moving averages are coming out of compressions and breaking out on the upside. Something similar is being seen in RIL.
Another good company to look at is Schaeffler India. The company has shown very good growth and strong management commentary post the June quarter results. Its stock price shows a good breakout past all time highs of around 6000 and now consolidation above that level.
HDFC Ltd has broken out above its 6 month highs of 2690 and is managing to stay above that level since past few trading sessions.
To conclude, I feel that if we are invested in small and midcaps it makes sense to be careful and follow strict stop losses or be very choosy to be in fundamentally good companies. There does not seem to be any panic bells yet, but it always helps to be prepared and have a plan ready in case things go awry.
Regards
Dr Hitesh Patel
Thursday 19 August 2021
Weekend Reading
Wednesday 18 August 2021
The Four Pillars of Future Business ~ Megatrends in the Making
“The only function of economic forecasting is to make astrology look respectable” said John Kenneth Galbraith. And he was right. One of the reasons economic forecasting, as well as financial market forecasting, is fraught with such a high degree of risk is because it operates in a complex adaptive system. One small change in one small component somewhere and there could be a large impact in a completely different system in an entirely different place and time.
However, looking at the future does require some amount of understanding of the present, trend-following characteristics and understanding of potential disruptions. With this in mind, I have tried to analyse the major pillars of future business change. Below are the four pillars of my mental framework for the future of businesses:
1. China + 1
2. Climate Change
3. Digital & Tech
4. Health & Wellness
A) China + 1:
With the battle lines drawn between China and the Western world, there is a definite possibility of a Cold War 2.0 ensuing in the next few years. Some experts say it is already underway. Global corporations will be forced to de-risk their sourcing and move away from their dependence on China as their sole supplier. Global supply chains may have to reorganise to reduce and remove the domination of a single point of failure.
However, China + 1 is not just reducing dependence on China. It is a complete overhaul of the decades of policy of super-efficient supply chain systems. The just-in-time delivery model is also likely to take a back seat as companies build inventory and build in some slack in their supply lines to take care of unforeseen events.
With increasing automation and the use of technology, manufacturing is also shifting back to developed economies as labour costs start mattering less and less in the overall scheme of things. In addition, we also see a rise of nationalistic fervour across the world and politicians will be more likely to promote companies that create jobs in their countries even at the cost of maximum efficiency.
B) Climate Change:
The 2030 Paris agreement and other such agreements will force countries to regulate agents of climate change and take corrective actions. We have already seen China act on this by banning chemical factories and other highly polluting plants. This is likely to become more of a trend. As more and more developed and slowly developing nations understand the true cost of climate change (increased weather disruptions and natural disasters), they will be forced to take action.
Governments and corporations will have to focus on better sanitation, clean water and clean air. We are already seeing the beginning of this. Increasingly difficult emission norms for automobiles and their resultant switch to cleaner fuel and EVs; large water treatment and desalination plants; efforts towards rainwater harvesting; solar and wind energy adoption and many more such initiatives are picking up across the world.
We are also seeing a thrust towards biodegradable products, banning of plastic use, recycling of products including the right to repair (something new for the developed world which we have been doing forever!!) .
C) Digital & Tech:
What can I say about this that has not been talked about already by everyone? Technology has become ubiquitous in our lives. Online classes for students, mobile games, the rise of esports, 101 apps for every conceivable activity are now a part of our lives.
Next is the Metaverse. You may be able to travel to Alaska without ever leaving your sofa, or do your online shopping by walking through the virtual store and pick products, just with a VR set.
Companies will increasingly be dependent on tech to not only move ahead of their competition but just to survive! The better a company is at using tech, the more competitive it will be.
D) Health & Wellness:
Sitting indoors due to a pandemic, people across the world seemed to have realised the value of health and wellness. People and governments across the world have fallen short in managing the pandemic and the scars of this will take a very long period to heal. So, there is likely to be increased focus on healthcare spending across the board - governments, corporates and households.
The entire spectrum of health and wellness - diagnostics, online consultations, e-pharmacies, online health records, medical insurance, preventive health care will fall in this ambit. Mental health has emerged as a subject that people have openly started discussing and it is likely that a lot more focus will be in this area as well. Companies in these areas would definitely have a tailwind for the next few decades.
Companies will get both positively and negatively impacted by one or more of the four pillars. Business strategy will require thought and investments in these four pillars. As investors, we need to evaluate how one or more of these four pillars affect the business that we own and how they are addressing these issues as corporates.
Thursday 12 August 2021
Weekend Reading
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Tuesday 10 August 2021
Hitesh's Blog : How do we position ourselves in the current market?
The small and midcaps index has been under pressure since the past few days especially after the nifty crossed the strong resistance of 16000 mark. There is a clear paradox at play here. Nifty made multiple attempts to clear the 16k mark and failed multiple times.
Every time it went down and came up, there were different sectors which attained market fancy and rallied hard. Sectors like real estate, textiles, tea/coffee, paper, metals and mining etc, just to name a few kept popping up off and on. All this while, some sectors which seemed to be in a sectoral longer term uptrend like chemicals and speciality chemicals, API/bulk drugs, etc continued to remain in a steady uptrend.
Ever since nifty crossed the much coveted 16k mark, it seems broader markets were jinxed. To begin with there was a loss of momentum in most of the fast running stocks and sectors and after a few trading sessions, there have been sharp cuts in the small and midcaps space in the past couple of days. This has been masked by a healthy looking index chart. But that takes nothing away from the fact that a lot of portfolios skewed towards momentum and small and midcaps have suffered damages.
Today seemed to be a day of panic selling where there were widespread cuts of 5 to 10% or more across many stocks in broader markets. This may be partially over or might extend a little more but usually after such a drubbing there is a bottom in place to be followed by a strong rally. We need to observe the next few days to see how things play out.
Personally I think even if there were to be a rally the strong frothy trend seems to have been broken and we might have a more sedate looking uptrend if and when it materialises.
So how do we position ourselves in such a market?
The idea should be to get out of stocks and sectors which have broken their trends and follow strict stop losses. And get out of stocks with questionable quality if one is holding them. The good thing about most corrections is that post they are over there are always winners to be picked up. These may be stocks which already were in an uptrend but just took a pause or some stocks which enter into fresh uptrends. We will continue to search for stocks with such characteristics.
We have received some queries about how to go about following stop losses. We usually follow end-of-day stop loss wherein if our given stop loss is violated on a closing basis , we send a mail in the evening or night to exit the stock on the following day. However if someone wants to be aggressive they can exit on the same day when the stop loss is violated in the last hour of trading. Since we have a system we follow, we tend to follow it as in the past. If and when we feel there is a need to change it, we will revert back to you.
The other query is on the allocation part. We do take care to pick companies with good fundamentals ready for a technical breakout or which have already broken out so that even if someone misses out on executing stop loss for whatever reason, the return of capital is not jeopardized to a large extent. Within Hitpicks, we would advise to allocate around 5% of the portfolio to an individual stock at the time of recommendation and watch things for a few days. If the trade begins to play out, one can increase allocation slightly to take it up to 7 to 10% of the total capital allocated to Hitpicks in your portfolio.
Wishing you all the best of health and wealth,
Regards,
Hitesh.
Thursday 5 August 2021
Weekend Reading
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