SIP: Double your SIPs for the next 6 months; broad-based allocations: Sunil Subramaniam

“Liquidity naturally reacts negatively and therefore prices fall, but has this crisis changed the fundamental dynamics of the Indian economy? I would say no. Only short-term commodity-related prices on Indian grower margins are going to be impacted and that impact is again going to depend on whether or not demand picks up in India,” says Sunil SubramaniamCEO and CEO, Sundaram Mutual

They say never waste a crisis, but the problem is that we don’t know how long this crisis will last. If this crisis continues for another two or three weeks, the markets could be significantly lower than they are now. So what is the best way to keep faith for a long-term believer? Or is it now time to start thinking differently?
A crisis always creates the best buying opportunities. Since Sensex started, just 40 days of buying has accounted for 80% of the return. These are days of strong correction. So for me, I don’t think a longer-term investor should panic or change the methodology of looking at the market. The market always goes through a greed-fear combination. When we are greedy, if you are not greedy and when they are fearful, if you are greedy, this is the best way to make money in the market.

So in a crisis like this it could go on for another two or three weeks and the market could very well end lower, but neither you nor I know because a single deal between Ukraine and Russia will make the crisis. You can never time a market bottom. Given that there is a probability that the markets will be lower within a few weeks, what are you doing today? Are you buying or not buying? My ense is that you have to buy but don’t put all your money in right now; ladder it and once you ladder it, you buy it because then you take the uncertainty out of how long this crisis will last.

So the crisis being an opportunity, it’s always a U-shaped opportunity and not a V-shaped opportunity where you have to buy today, otherwise you miss the boat. With the U-shaped opportunity, you can buy anywhere at the bottom. Granted, you might not get the best deal possible, but whatever you get when you buy from the bottom, you’re only talking about whether you’ll double or triple your money in the medium term.

Buy levels don’t matter as long as you are buying in times of fear and that is classically the case today as liquidity tends to react to news feeds and expected news flows . Liquidity naturally reacts negatively and prices fall, but has this crisis altered the fundamental dynamics of the Indian economy? I would say no. Only short-term commodity prices on Indian producer margins will be impacted and this impact will again depend on whether or not demand picks up in India.

I would say leave Ukraine alone, leave everything else alone. The domestic consumer is not going to buy because of the Ukrainian crisis. They are going to go and consume and for me the successive summers linked to the impact of Covid on consumption means that there is a high probability of a rebound in domestic consumption from this summer. When consumption increases, when demand exceeds supply, that is when price increases can be passed on.

So today, because demand hasn’t increased yet, we’re seeing the pressure, and the earnings results show that margin pressure. We say oh! EPS will go down, current valuations are acceptable and all that, but that could change very dramatically because at the end of the day the Indian economy is to a large extent inward looking and when a large part pent-up demand will play out, we will find the impact of commodity prices on producers may be less.

So to that extent the strong companies will get through this crisis and because of the fear psychosis the big quality banks are falling today and this is a great opportunity to buy them. The thing is, it has to be staggered because you can’t predict how outside forces will react over the next two to three weeks. My recommendation is that if you have cash, you have to put it on the market. If you have SIP running, I will double the installments for the next six months.

Does it deserve, at a time like this, to perhaps have a higher allocation to large caps in your mutual funds?
On the contrary, I would say that now is the time to expand because it is a good time to invest. It is essentially the domestic economy that has suffered the horrors of the Covid and which suffered even before the Covid from the financial crisis and the negative inflation that we experienced at the beginning of 2018.

The Indian economy is on the verge of recovery. If the Indian economy recovers, you will clearly see that mid and small caps as corporate earnings would beat expectations better than large caps. Largecaps have benefited from FII inflows and this tendency for FIIs to favor safety in a growing economy and the correction is naturally affecting largecaps. We say largecaps have corrected so much, should you buy? I would say no, because whenever large caps go up, FIIs get hungry for India again. But this is far from the case given the situation in advanced countries. But domestic flows and domestic mutual funds, domestic institutional investors have a strong connection to the domestic economy and EPS growth, that is, domestic demand, domestic investment spending led by national infrastructure. This is a game that is a much larger game than a purely largecap game.

FIIs sell what they consider their darlings due to allocation within the index, but DIIs cannot match their sale amount of rupee for rupee because they buy what makes sense for them and just because a particular big bank has fallen so much that’s the case doesn’t mean they’re rushing to buy because in the rebound not all of the FII selling is being absorbed by the shares of DII for stocks or dollar for rupee.

DIIs take that SIP money and flows it and distribute it to the wider market. So I would say that investors should also take inspiration from that and say that ultimately the future of the Indian stock market in a wider space – the national economy and I would argue for increased allocations to a multicap space wider instead of just buying large cap stocks because they fell.

James V. Hayes