Is Averaging Down a good strategy? |
|
Markets have been jittery this week as well and now that markets have been consolidating for the past 6 months or so, the popular advice doing rounds is to buy the dip and average down on existing positions. While averaging down does seem intuitive, it has been observed to be a wealth destroyer for many investors. |
|
When investors average down, they either take a contrarian approach or hope for the stock’s past performance to replicate in the future. For instance, let’s say a stock was worth Rs. 150 in the past and you entered the stock at Rs. 100. Now it has fallen to Rs. 80. In this situation, many investors, especially retail, tend to hope that the price will rise back to its previous highs, without examining what has caused the stock to almost half. So they double down their position, feeling elated that their average cost has dropped but the reality is that now they have a higher allocation to a trade, which is more likely to be a losing one. This is primarily because investors fail to understand that going against the trend can also mean you’re overlooking the risks that are causing others to sell. |
|
Also, averaging down is susceptible to behavioural biases such as the Sunk Cost Fallacy and Loss Aversion. The former is the phenomena in which a person is hesitant to leave a strategy because they have invested substantially in it, even though abandoning would be more profitable, whereas the latter is the phenomenon in which investors are apprehensive of accepting losses. |
|
Further the fact that stocks that have collapsed due to lacklustre fundamentals or due to poor corporate governance, such as DHFL, Reliance Communication, Suzlon, etc., tend to have among the highest retail holdings, also proves this point. This is because smart investors generally exit such positions post seeing signs of stress on the company, rather than averaging down on their investment. |
|
So, the key takeaway is that averaging down only makes sense if you are convinced that the fundamentals of the company haven’t deteriorated and that the future prospects are likewise appealing. Else, you will end up fitting into the popular phrase ‘Losers Average Losers’, coined by the famous hedge fund manager, Paul Tudor Jones. |
|
Event of the Week |
|
The market has been debating and researching on LIC for months and now the much-awaited IPO is set to hit the streets. In an attempt to entice investors, ensure enough liquidity and also initiate meeting their disinvestment targets, the government has decided to sell a merely 3.5% stake in LIC. Even post the reduced issue size, LIC remains the biggest IPO in Indian history and is expected to test investor appetite next week amid bumpy markets globally. What’s surprising is that IPO is valued only at about 1.12x of its embedded valuation, much lesser than what was being speculated by market participants. Given the ultra reasonable valuation of the insurance behemoth, an upward re-rating of the private players is off the table as of now. |
|
Technical Outlook |
|
Nifty 50 Index closed on a negative note and continued to consolidate in the range of 16,900 to 17,350. The support zone around 16,800 is established as a very crucial level as there have been multiple rebounds from these levels. Last week Nifty formed a doji candlestick and this week the index has formed an inverted hammer pattern just around the support zone. This hints that a minor bottom is in place and possibly a breakout on the upside is expected. We suggest traders maintain a bullish stance on Nifty for a couple of weeks, targeting a retest of 18,000 levels. A strict stop loss just below the immediate support of 16,850 should be maintained. |
|
|
|
Expectations for the week |
|
The main headliner globally would be the FOMC meeting, and it is largely expected that a 50bps point hike is incoming. If Fed’s actions are more hawkish than expected, knee jerk reactions may be seen. Also, the unemployment rate will be tracked closely. Back home, the monthly auto sales numbers are bound to pique the interest of investors attempting to forecast future trends in auto stocks. Also, as India’s biggest IPO, LIC, is about to hit the street, there may be some impact on the secondary markets considering that liquidity will be channelled towards the IPO. Given these events and the current earnings season, the volatility experienced this week is expected to continue into the following one as well. Nifty 50 closed the week at 17,102.55, down by 0.40%. |
|
Is the retail saga nearing its end?
|
|
The tussle between bears and bulls continued
this week as well. Apart from the global
headwinds and the fall in index
heavyweights, another observation of why
Indian markets are failing to hold up is
that lately, FII sell-off is not being
completely absorbed by the DIIs, who were
pumping funds on the back of the high retail
SIP inflows. So far in April, DIIs have
absorbed less than 60% of the FII sell off.
The DII absorption for the last two months
was close to 92%. Further, even between
October and February, the combined
investments by DIIs and retail investors
surpassed the net sales by FIIs. Now as
signs emerging that incremental retail
participation in the short term at least may
not be as buoyant, it remains to be seen if
retail participation can hold up.
|
|
Over the past two years, there has been a
high influx of retail investors particularly
stemming from the quick returns that
equities have generated. However, since the
market has put up a lackluster performance
during the previous six months, retail
investors may feel less motivated to trade
with the same frequency. Even with the
complete opening up of the economy,
investing in equities actively may be pushed
to sidelines for quite of them. Further, the
rising inflation can likely reduce retail
participants' disposable income, and thus
investable funds. Furthermore, with SEBI's
embargo on NFOs till the end of June,
incremental investments over and above SIPs
may be limited. So taking all of this into
account and the fact that retail investors
have a tendency to be loss averse, it will
be interesting to see if they can survive a
protracted period of poor returns. Chances
are that considering the fear gauge and
volatility in the markets, they may delay
making new investments until a glimmer of
hope appears.
|
|
Event of the Week |
|
The kick start of the result season failed
to appease market sentiments as most of the
positives even on the earnings front are
completely priced in the current valuations.
What is being observed is that stock price
reactions are magnified for every hit or
miss vis-a-vis market expectations. Basis
the IT majors who reported their results so
far, the numbers are not as disappointing as
the market has perceived them to be. The
management commentary suggests that there
are more supply side issues that are eating
into the margins and the overall outlook
still remains optimistic as the underlying
demand is robust. However, the stock price
movements hint that Mr. Market is now
penciling in a de-rating of these stocks
considering the margin misses and rich
valuations. This can also partly be
attributed to the tech carnage we have been
witnessing globally. Considering that the IT
sector’s outlook continues to be promising,
investors can now look at companies where
risk reward has become favorable for
initiating long term investments. |
|
Technical Outlook |
|
While Nifty
50 index ended the
week on a
negative note, it quickly re-gained most of
the loss after re-testing the crucial
support of 16,800 mid-week. Nifty Small cap
and Midcap indices are outperforming the
benchmark indices, which is a bullish sign.
While the index is now constrained within a
broad range of 16,800 to 18,100 levels, we
advise that a mild bullish outlook be
maintained going ahead. Since 16,800 has
emerged as a strong support, traders are
advised to remain watchful, as a decisive
break below it can lead to weakness in the
short term.
|
|
|
|
Expectations for the week |
|
The quarterly results of the companies will
continue to occupy center stage and will be
the key factor steering the market's
direction. Further due to the monthly
expiry, volatility will be on the higher
side. Mr. Market will also keenly monitor
the war situation, the movement in treasury
yields and in the dollar index. Further,
given that there has been a resurgence of
Covid cases in some regions of India, the
pace of infection spread will also be
tracked. Taking these factors into account,
market movements will be choppy. Investors
are therefore advised to tread with caution.
Nifty closed the
week at 17,171.95, down by 1.74%.
|
|
Can Large Caps make a comeback?
|
|
In this short-action packed week, Indian
indices moved in tandem with global peers
and experienced volatility with midcap
indices inching towards one of the sharpest
single-day fall in nearly 2 months. The
performance of midcaps thus far has been
quite resilient. If we look at the last 6
months, Nifty
Midcap 50 has moved almost in
sync with Nifty
50.
Currently, in spite of
the broader corrections, midcaps are still
trading at a premium to large caps. As we
stand at the cusp of an economically crucial
situation, the key question is whether we
should fasten our seatbelt and ride the mid
caps or opt for a stable ride with large
caps?
|
|
Historically, in times of declining economic
growth, it is the large caps which have
outperformed. When GDP growth dropped
between 2010-2012, Nifty50
rose close to 13%
whereas Nifty Midcap 50
declined by 11.9%.
Similarly, in rising inflation phases,
such
as between 2007 to 2010, the former
gained
53% while the latter gained 30%. This is
also attributable to the fact that in
the
environment of rising inflation and
moderating growth, generally larger
companies having dominant market
positioning
tend to have more pricing power,
allowing
them to take price hikes without
significantly impacting demand. This
makes
large caps better placed than mid caps.
Apart from this, large caps will likely
be
the major beneficiaries if the FIIs make
a
strong comeback in Indian equities.
Further,
with Fed tightening its balance sheet
and
given the building pressure on global
markets, the short term direction seems
unclear. In such uncertain times, large
caps
due to their lower risk factor turn out
to
be preferred investment choices.
Therefore,
as the road appears foggy, investors
should
overweight large caps in their
portfolios
and chose a relatively stable ride.
|
|
Event of the Week |
|
Mirroring the US treasury yield, India’s
benchmark 10-year bond yield surged to its
highest level in almost three years and
breached the 7% mark. This is mainly
attributable to the hawkishness underlying
the country's monetary policy committee
measures announced last week. Even though
the stance is still accommodative, rising
inflation seems to have finally caught RBI’s
attention. While the spiking bond yields can
negatively impact existing investors, it
makes bonds more attractive as an asset
class thus keeping the investors muddled for
investment options. As the trajectory of the
number and timing of interest rates hikes by
RBI become clearer, the 10-year bond yields
are likely to rise further from here. |
|
Technical Outlook |
|
Nifty 50 closed the
week on a negative note and formed an
evening star candlestick pattern on the
weekly time frame, which is a bearish sign.
After October 2021, the benchmark index has
been forming a lower top lower bottom
pattern and the overall structure of the
market across broader indices also has been
shifting to the bearish side. Nifty is now
trading just at the immediate support of
17,450 and a sustained move below the
same
may lead to a retest of 16,900 levels.
We
suggest traders maintain a mild bearish
outlook going into the next week.
Immediate
resistance is now placed at 17,850
levels.
|
|
|
|
Expectations for the week |
|
In absence of any significant macroeconomic
events, markets will concentrate more on
quarterly results as they gain pace. Banking
and financial services stocks will be in the
spotlight and market participants will
closely follow management insights about
their outlook on economic activity, loan and
deposit growth, asset quality, and
collection efficiency. As a slew of IT firms
are set to announce their quarterly numbers,
this sector will also be in focus. Stock
specific movements will be prominent and as
investors react to earnings misses and
beats, they are advised to assess the
company's long-term potential rather than
basing the investment decisions solely on
quarterly performance. Nifty50 closed the
week at 17,475.65 down by 1.74%. |
|
What to bet on – Growth or Value?
|
|
Markets greeted the new financial year with
high spirits as Nifty crossed the levels of
18,000. Though the rally failed to persist
over the week, questions over the valuations
of benchmark indices and investing in value
stocks started doing the rounds as Nifty
rebounded ~15% from the lows of March. Over
the past two years, markets have skyrocketed
to new highs, with the MSCI Value index
delivering ~90% and ~16% gains in FY21 and
FY22, respectively, compared to the MSCI
Growth index, which climbed ~56% and ~17%.
This indicates a clear outperformance of the
Value index over the previous two fiscals.
Now, the real question for the market
participants is which theme can dominate in
FY23 – growth or value?
|
|
From where we stand today, interest rates
have bottomed out and a slew of rates hike
await us. The rising inflation and interest
rates will only lead to a spike in bond
yields. In the past decade, there has been a
positive correlation between bond yields and
the performance of value stocks as during
periods where the 10 year Government
Security yield has risen, the MSCI Value
Index has also rallied. Similarly, in
periods of falling 10-year bond yields, the
value index has largely declined. Further,
the current macro-dynamics especially the
supply disruptions, the soaring inflation
and the potential dent on demand can, to
some extent, eat into the growth of
companies. Considering the robust recovery
since the pandemic, high growth expectations
have already been built in the stocks
valuations. Even a minor miss in delivering
on these expectations can result in a
magnified impact on the stock price and lead
to earnings downgrades. While the upcoming
quarterly results will be critical in
determining the trend that can dominate, the
factors laid above suggest that value stocks
are likely to outperform growth stocks, at
least in the short term.
|
|
Event of the Week |
|
The consolidation in the Indian financial
sector has just clinched a sequel. Unlike
the first part which was directed by the
public sector banks where the industry
witnessed a series of mergers, this time
however, it is the private sector players.
On Monday, HDFC
bank
announced the merger
with its parent entity HDFC Ltd with a
rationale to enhance its housing loan
portfolio, increase its customer base, and
enable HDFC Ltd’s portfolio an access to the
low cost of funds. This news was announced
while the echo of Axis
bank
acquiring the
retail business of Citi was still audible.
These mergers have a broader implication for
the sector rather than merely increasing the
competitive intensity. New players might
find it difficult to sustain their momentum
as offering higher interest rates on
deposits may not be a sustainable option in
the long run. Additionally, post RBI
tightening the non-banking norms, NBFCs
now
face regulations almost at par with those of
banks. These factors can further propel M&As
in the financial services space. |
|
Technical Outlook |
|
Nifty 50 index
closed on a
positive note but
faced strong rejection at 18,100 levels as
selling pressure rose. The index has formed
a shooting star candlestick pattern at
channel resistance drawn from the all-time
high, which hints at a bullish momentum
slowdown. Similarly, US indices as well as
European ones are establishing a lower top.
Having said this, their short-term trend is
still bullish. With this backdrop, we
suggest traders maintain a mildly bullish
outlook as long as the Nifty does not break
below 17,600 levels. Immediate resistance is
now placed at 18,100 levels.
|
|
|
|
Expectations for the week |
|
While globally investors will be keenly
monitoring inflation figures in the United
States and China, Indian CPI print will be a
key domestic factor to monitor. It is
expected that the number will be north of
RBI’s tolerance limit but a higher than
anticipated spike in inflation can cause
knee-jerk reactions. Further, Indian IT
companies will be in focus as the leaders
will be reporting their Q4 results. While it
is likely that revenue growth in IT
businesses will soften sequentially,
margins, revenue guidance, and attrition
numbers will be crucial indicators to track.
Given the macro factors and onset of
earnings season, volatility will be elevated
in the upcoming truncated week. Investors
are therefore advised to invest in resilient
stocks which have a reasonable risk-reward
ratio. Nifty50 closed the
week at 17,784.35 up by 0.64%. |
|
Should you subscribe to the upcoming IPO
season?
|
|
The last week of the FY22 kicked off with an
upbeat mood, moderating the fear gauge
indicator IndiaVIX. As the D-street is
showing signs of stabilization, primary
markets seem to be buzzing again. While FY22
was a record year for IPOs, the momentum is
likely to continue in FY23. Thanks to the
booming bull market, 74% of the IPOs that
hit D-Street in the fiscal that ended
witnessed stellar listing gains, ranging
even upto 270%. Having said this, the real
winner amidst this IPO frenzy were the PE/VC
investors who managed to garner a whopping
~Rs. 827 Bn from the Indian primary markets,
which is over 4 times the amount they cashed
in FY21.
|
|
Primary markets have a tendency to be
euphoric in bull markets and this proves to
be an opportune time for promoters and PE/VC
investors to ask exorbitant valuations for
their companies. Fascinated by the greed of
quick money, irrationality prevails and all
investors jump on to grab a piece of the pie
irrespective of the valuation. What
investors miss is that when the tides turn,
such companies are the ones who underperform
substantially. Although the BSE IPO index
has
outperformed the
Sensex over FY22, in the
past 6 months the IPO index has
significantly underperformed by 17%. In
fact, currently, nearly 40% of the IPOs are
trading below their issue prices and 62%
trading below listing price, thereby eroding
the wealth of investors, especially the
retail category. SEBI also, recognizing the
pain of retail investors, has initiated
tightening certain rules pertaining to lock
in for the anchor investors, offer for sale
norms and pricing of the new loss-making
firms. If there is one learning that retail
investors want to take away from FY22, then
it should be to not fall bait to such
frenzies. They should evaluate each IPO
based on its merit and remember that
overvalued ones most likely will be
available cheaper once the euphoria ends.
|
|
Event of the Week |
|
Mergers and acquisitions (M&A) deals in
India reached an all-time high in 2021 and
this week seemed to have set the ball
rolling for 2022. D-street saw three huge
mergers across industries, including one in
the film exhibition space that nearly gives
the merged entity a lion’s market share. All
the three announcements were cheered by the
street and the respective stocks were seen
in shooting up swiftly. It seems that
inorganic growth plays and industry
consolidation theme have begun dominating.
In 2021 as well 60% of the deals were
between companies engaged in the same line
of business. The primary goal of such
transactions has been to transform a
company, gain significant penetration and
scale rather than merely growth. On the
other hand, larger conglomerates are using
the inorganic route to reshape their
portfolio and venture into emerging business
areas. While FY22 has seen most of the
acquisitions in the technology space, it
will be interesting to see how the trend
shapes up in FY23. |
|
Technical Outlook |
|
The market posted a couple of gap-up candles
and closed in the green for the week despite
rather weak global markets. Post the narrow
range-bound trading last week, Nifty index
seemed to have found a cushion around 17,000
levels. With the benchmark successfully
breaking above 17,500, the short-term trend
continues to be bullish. Thus, we suggest
traders maintain a bullish bias targeting a
retest of the immediate resistance zone
around 17,800 levels. Declines on the
downside are likely to remain capped around
17,000 levels.
|
|
|
|
Expectations for the week |
|
Markets globally will react to FOMC’s
minutes’ that will be released next week.
Back home, RBI's MPC meeting will take
centre stage guiding the mood of the market.
Unlike its overseas counterparts, RBI has
thus far been growth supportive rather than
targeting measures to curb inflation. The
changing macro-dynamics due to the war, rate
hikes projected by FED, need to nurture
domestic demand and support the government’s
increased borrowing indicated in the budget,
have put the RBI in a challenging situation
and all ears will be on how RBI chooses to
address these. These factors coupled with
the pricing in of expectations of the
upcoming earnings season can cause jittery
movements in our markets. Investors are
therefore advised to be cautious before
venturing into any aggressive bets. The Nifty50 closed the
week at 17,670.45, up by 3.02%. |
|