InvestorQ : With the Coronavirus spreading across the world and risk of global slowdown, how should I create an investing strategy in these times? Should I just stick to front line stocks?
Angel dcosta made post

With the Coronavirus spreading across the world and risk of global slowdown, how should I create an investing strategy in these times? Should I just stick to front line stocks?

Anamika Sodhani answered.
2 years ago

That may be too simplistic. For example, L&T is a frontline stock but it is at a 3-year low. Holding on to such stocks will add little value to you. You need to be selective but you also need to focus on growth. This is the time to focus on growth with stability. Here are four themes to focus on in such difficult times.

Non-cyclical businesses are the best bet in such times

If you wonder why Titan or Britannia is doing better in these markets, there are no prizes for guessing. When we talk of non-cyclical businesses we are obviously talking of companies that are in the non-commodity space. In an economy like India, this could mean stocks that are largely consumption-driven and could include sectors like FMCG, auto and private banks, which are largely a proxy for the consumption growth story. A slowdown would mean impact on domestic growth but that is likely to be more in the mass market rather than the niche markets. Avoid cyclical sectors like commodities, materials and capital goods. They get hit the most when the investment pattern changes. L&T is a case in point.

Corporate governance is more important than ever at this point

If you look at past slowdowns in India and globally, you will find that the companies with strong disclosure practices and governance standards have thrived better. One has seen the way banks like Yes Bank and RBL Bank lost value in the last few months. At the same time, the established names like HDFC Bank and Kotak Bank did a better job of holding value through these tough economic conditions. The problem with vulnerable banks is that the story starts to unravel when there is an economic slowdown and that is where strong standards of corporate governance come in handy. Also be cautious companies which do not really have a second line of defence in management; look at what happened to Coffee Day Enterprises, Yes Bank etc. Governance and succession planning matter a lot.

In tough times, a global franchise can make a big difference

A stock like Infosys or TCS holds value in tough times due to its strong international franchise and its revenue flows. We are referring to dollar defensives. These are the sectors operating in global markets where India has a distinct advantage. Not only these companies are immune to the domestic demand conditions, but they also benefit from lower costs in India. When we talk of dollar defensives, the sectors that come to mind are IT, Pharma and auto ancillaries. The auto ancillary space is undergoing a churn due to a global shift in auto demand, but that will eventually come back. IT stocks are good defensive bets but may still be market performers, at best, due to the rally in the last one year. Pharma may have China related supply concerns at this point of time. The bigger your global franchise, the better in tough times!

It is not about stock but about margin of safety

Margin of safety is the margin that the cash flow value of a company has over the market price; and higher the better. This may not be a standalone measure but this can be used as a complementary measure if any of the previous three conditions are satisfied. Margin of safety is a concept first popularized by Warren Buffett and refers to the comfort or the room for error in valuation models or in macro assumptions.

Margin of safety assumes a lot of importance in these tough times as it gives that additional level of comfort to investors. You know that the stock can lose price but still remain valuable.