No action is best action...

Our bruised, bombed (and barely alive) twin portfolios stubbornly continue their journey across the desolate investing landscape. These are certainly not the happy days that we had dreamt of when we launched the portfolios. Safe Wealth’s NAV has slipped almost 3% to Rs 10.29, while Wealth Zoom has eroded by about 2% from its not-sorespectable Rs 9.74 to Rs 9.53 only. But this is nothing compared with the 6.8% fall in the Nifty and 4.2% drop in the CNX Midcap index during this period.

We have no action this fortnight, except for a few dividend inflows. I am tempted to use the 50% plus cash levels to buy some high-conviction stocks, especially with so many of you suggesting new and interesting stocks in our now-active blog spaces. But with more and more trouble brewing in the pipeline (inflation, fiscal deficit, harder interest rates, political turmoil and a mixed bunch of early Q1 results), I think this is one fortnight when no action is the best action. We’ll wait patiently.

Meanwhile, the Sensex has slipped to under 13,000 and is poised at a level where serious bottom fishing would normally have begun. But it hasn’t. And what they say during every bull run applies equally to the bear phase as well: “This time, it’s different!”

Why? For one, there’s a confluence of negatives. Have you noticed how the bad news keeps flowing in? Today, it’s the continuing credit meltdown and housing price contraction in the US. Yesterday, it was the global imbalance brought about by oil prices, and soon it could be a slowdown in the BRICs economies or an environmental crisis precipitated by global warming due to carbon emissions. There’s hardly anything that induces cheer in any class of investor in just about any country these days.

Another reason that the current downturn is different is that it is led by one big monster—the continuously rising price of oil in the face of stubborn demand and peaking supply—that defies all reasoning. And this monster threatens to destroy the consumption appetite of the world’s usual economic saviour (the US). Where does that leave India?

No matter how strong your conviction in India’s growth story, you have to admit that we have been set back by at least a couple of quarters. The two engines of Indian economic expansion—low interest rates and high development spending—have evaporated in less than six months. Nor is there any new found strength in the demand for our traditional exports—gems and jewellery, software and textiles.

If the first quarter numbers are somewhat decent, it’s only because the pain in the business pipeline is not yet out, say the experts. Yours truly had the good fortune of meeting a number of fund managers recently. They look after mutual funds, hedge funds, country funds, HNI portfolios and proprietary books of global investment banks. And all of them were equally clueless about what they should do next. One of them actually asked me: is the world coming to an end?

Of course it isn’t. But this certainly points to the onset of the final phase in the bear market. Everyone is now a prophet of doom and gloom. Even a single quarter of indifferent corporate performance can lead to earnings downgrades. Client redemptions and rejections can (and will) rattle the coolest of minds. During this phase, we might see the best guardians of money losing their composure.

This phase could see the markets grinding down longer than the first phase (wherein the correction set in swiftly). And this slow grinding might take it to below the “fair” value. Remember, the market’s pendulum swings both ways. On the way down, it can aggravate your pain just as easily as it gave you cheap thrills on the way up. The end-game to this phase could well be a few rounds of tragic capitulation as investors pull out money just when they need to hang in.

Sector reshuffle might occur as laggard sectors, such as consumer goods, IT, pharmaceuticals or even textiles, long neglected in the bull run, find favour in the face of collapsing prices in punters’ favourites such as capital goods, energy, commodities, construction and real estate and banks and financials.

Value might come back into fashion as growth slips out of reach. And, perhaps, a new bull phase will begin. Till then, we’ll settle for survival.

Readers’ response

A bearish phase is one where you get blue chips, or rather future blue chips, dirt cheap. My best long-term pick (minimum five years) would be Fortis Healthcare. The share is quoting at a 45% discount to its issue price of Rs 108. Promoter Malvinder Singh is flush with cash after selling his stake in Ranbaxy. So he would be on the lookout for more buyouts and merge them with Fortis.

—Srikanth Matrubai

Since the nuke deal with the US is almost through, Dipen, can you think of re-picking Areva T&D? It’s still at high valuation, but a clear benefactor of the deal.

— Pramod T Palathinkal

I will stick my neck out with my picks, Birla Corp and LMW. Yes, LMW’s order book has been flat over last year, but if you look deeper, this company doesn’t have pre-booked orders. So, the order book doesn’t always indicate a company’s prospects. If the share price goes down further and if I have spare cash, I will invest further and not rue the paper loss. Over a longer period of time, a 10-20% return is good and I shall be happy with it.

—Lakshmikanth

Disclaimer: Model portfolios are based on the independent opinion of Dipen Sheth, head of the research team at Wealth Management Advisory Services. They do not reflect the opinion of the firm.They are for reference and information of readers.The firm is not soliciting any action based on the portfolios.