Saurabh Mukherjea's 4 basic essential stock picks in times of volatility

We have been speaking regularly through this fall but the kind of pace and free fall we have seen, continues to surprise all of us. Every day it is a new low and it is just abysmal!
This was bound to happen. It became clear once coronavirus went through the western economies like Italy. The western economies set the tone and tenure of the world and as people die in the west, it was clear that accelerated selling would be seen in Wall Street. In all possibility, this will continue for another couple of weeks.

Our job is not to talk back to the market and say this is what the market is telling us. It is easy enough for everybody to see what the market is telling us. Our job is to look at hard facts, at data, rather than looking at stock prices and reverberating the stock price back to the market. There are three sets of data that one can look at. There is enough data now from the east Asian economies -- not just China, but Japan, Korea, Vietnam, Taiwan and even Iran. The data is clear that the coronavirus death rate charts are falling quite sharply. They all peaked out around two weeks ago and a in a whole range of east Asian economies, including Iran, west Asia, the worst of the coronavirus hit seems to be behind these countries. That is important for India because the threat of supply side disruption that we are all worried about -- pharma, auto, electricals -- is receding and that is quite a big deal for our country. We import nearly $70 billion worth goods from China each year.

The second point is our export dependence on the west, beyond IT services and auto, is relatively low and that should matter to the Indian stock market. We are not an export-centric stock market, unlike stock markets like Hong Kong which have a very high export centricity.


The third point is the domestic lockdown. Given how things are proceeding across the world, one should expect some degree of domestic lockdown in India over the next month or so. We got a nice case study of demonetisation that nearly shut the economy down for two months and in spite of that, the economy grew at 7% that year. Now there will be some GDP hit from a lockdown I am sure, but if the Indian economy could bear even a two month hit in DeMo, a lockdown should not have that big a hit.

NBFCs and banks with heavy wholesale market dependence are the main fault line of the Indian economy. Beyond that, we are in pretty good shape as a country

-Saurabh Mukherjea

Taking all of that into account and the fact that this is a virulent form of the flu virus and hence as summer comes, the virus should recede, it makes sense to stay invested. We are encouraging clients to put more money to work. If you buy companies whose balance sheets are strong, they will continue selling their essentials of life to millions of Indians who will continue living their lives in this country.

The main fulcrum of vulnerability will be the financial services sector and lenders who are wholesale market funded. NBFCs and banks with heavy wholesale market dependence are the main fault line of the Indian economy. Beyond that, we are in pretty good shape as a country to deal with this and all credit to the government for locking down foreign travel and preventing the foreign virus from entering India. We got to hold down our nerves through this. We are staying invested and encouraging our clients to put more money to work.

Do we try and call the bottom here? We have already hit one circuit today wondering if we are going to trigger the next one. How can one find rationale in this market, just to address the fear component?
Absolutely. Timing the markets in good days is impossible. On bad days like this, it will be foolish to say anybody can time markets. We certainly cannot time the market. What we have been saying for the last several years is whether it is during demonetisation, or during this sort of crisis, one needs to be factual and data oriented, rather than keep looking at markets and referencing the stock market correction whether in America or in our country.

If you look at the hard facts, there is reason for concern especially at a personal level. But the data from the most ravaged part of the world -- east Asia -- including countries which are not famous for having great public health systems, places like Iran or Vietnam, suggests that this is a very controllable virus. The reason the western countries are being ravaged more is they are older and they took a far more liberal attitude to this than the east Asian countries did and therefore the western countries will perhaps suffer for another month or so.

But even there, given the trend that we have seen in east Asia, the virus peaks six-seven-eight weeks into the process and then starts falling off. That trend is likely to come through. If we stay data oriented and rationally focussed on data and real economic impact, this is a crisis through which people should hold stocks.

We will buy through this crisis. We do not know when the market will bottom out. All we can do is focus on the facts and the facts suggest that it will have a modest economic impact. The one exception will be wholesale, market-funded financial institutions, some of the private banks, most of the NBFCs. But leaving aside specifically the systemically imposed zone, we are in. We are in a space where buying high quality companies which we love to do, looks even more tasty today than it did 10 days ago.

And what is on the dish? You talked about wholesale corporate funded banks. What else is attractive?
We have a responsibility to our clients to be sensible about how we invest through a crisis and therefore investing in companies which make the basic essentials of life, makes a lot of sense. Basic essentials of life was say Dr Lal Pathlabs. They do pathological testing. Presumably given the situation we find ourselves, path testing will become even more relevant in our country in the coming weeks and months.

Then there is a company like Nestle which makes infant milk powder. I cannot think parents will stop feeding their kids despite whatever lockdown we might be heading towards. A company like Relaxo which makes footwear for millions of Indians. I will throw in Divi's Lab. We have been buying that quite proactively for the last three-four months. The company makes 65% of the API for world’s painkillers. About 35% of API for world’s cough syrup, presumably their products will be in higher demand.

We are focusing on these stocks through the downturn. We own a fair bit of these companies anyway. We will try to buy more of them as others panic.