What is the right strategy to follow in a market crash? Sandip Sabharwal explains

“Sometimes aggressive FII sales in good companies provides them opportunity points. For example, the HDFC Group has been seeing a lot of selling. Now HDFC Bank has come to valuations which are slightly lower than ICICI Bank or at par much lower than other private banks and the premium of HDFC Bank over SBI is at a record low,” says Sandip Sabharwal of asksandipsabharwal.com


Buy high, sell higher is over. Buy on decline is getting challenged but sell on every rise is working now?
The market texture should have changed a bit earlier, given that there were several macro concerns related to the way commodities have moved, inflation, what the US Fed is likely to do, etc. But markets were in a zone of its own. We saw global investors continuing to reduce their position in India with domestic investors continuing to buy. Mutual fund flows continue to be quite strong, Rs 14,000-15,000 crore inflow into equities every month is quite substantial relative to historic trends and that gives some sort of cushion to the market.

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But are we in a perfect storm at a time when liquidity is so huge, inflation is picking up and oil prices are 27-28% higher than the levels at which the last time petrol and diesel prices were changed in India? Can the consumers take a 25% hike in petrol and diesel prices and still keep on consuming the way they have been for the other products? It is going to be a challenge. How the government evaluates it, whether it takes a hit in its balance sheet and then we get to fiscal deficit concerns. These are slightly difficult times for the markets as well as macros though some specific companies are doing well. They will continue to do well. But purely macro-wise market valuations need to reduce, especially given the result season also where ex of commodities, there has been an underperformance after three-four quarters of earnings surprises.

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The market needs to give up some gains. Technology, financials, etc, could take a hit in the near term and when the Ukraine invasion actually happens, so many investors might not have been there from the time when the Iraq invasion took place. When the invasion happened, the prices peaked off and subsequently they gave up a reasonable amount of their gains. So once the event fructifies, whichever way it is happening, I believe that there is a huge risk premium in oil and that might give away and give some relief.

Right now, there is bad news and bad prices. Is it time to start thinking contra? Is it time to buy that pain?
Contra thinking comes in when the buy-on-dip mentality in the market among the retail investors in general comes off. That is not coming off and so every time the market falls for one or two days, there is a huge amount of rush to buy the market. In India specifically, the recognition of inflation risk even among the policymakers, is not really there. I find it more concerning.

Globally also, the pass through of many of the prices will still play out going forward and there are several macro factors. For example, I was reading a report over the weekend that the US home buyers’ sentiment from a peak has fallen to multi-decade lows. People believe that now is not a good time to buy homes and that is a big driver of their economy. So, the macro picture is evaluating. We need to let the markets settle down lower, Longer term markets always do well; longer term, good companies always do well. If we get them cheaper, that is only better. So my guess is that we will see that happening and then the opportunities will come.

Is it the time to look at stocks which have lower FII holdings?
I do not know how that strategy will work because that would be a short term strategy but longer term, we have to buy stocks based on their growth earnings and valuations. That always has to be the strategy. What happens is that sometimes aggressive FII sales in good companies provides them opportunity points. For example, the HDFC Group has been seeing a lot of selling. Now HDFC Bank has come to valuations which are slightly lower than ICICI Bank or at par much lower than other private banks and the premium of HDFC Bank over SBI is at a record low. So, although it is a company which is well known, I think some of these companies are becoming interesting to buy now. I did not buy HDFC Bank for the last two-three years, but I would think that as this correction plays out, it will be a good opportunity for longer term investors to get into HDFC Bank which over the last two years has not given any return.

Quess Crop came out with a strong set of numbers across the board. But the sudden departure of the current CEO Suraj Moraje has raised doubts. How worried should investors be?
Investors need to be careful till the management change happens and we get to know the real picture over the next one or two quarters. People should not jump in just because of price action because sometimes corporate developments are significant and to that extent, it is better to focus on them rather than immediate results. We are seeing some selloff built in on the midcap side of the market which held on as the large caps corrected last time. Wherever there are some concerns, those stocks could remain weak for a few more weeks.

Let us assume that the macros are challenging which they are and which they will remain and that means the dollar should be strong and rupee should be weak. In this entire fall, the rupee has just about started weakening now. At what point in time will that become a tailwind for the technology sector?
The technology sector performed right through last year and the rupee was very strong. So on the flip side, when the rupee starts becoming weak, we cannot build a story that it should move up because of that because many of these technology stocks are held by global funds. They correlated very highly to the Nasdaq movements and if we see a deeper correction in the technology basket, then these companies cannot escape.

All of us remember the time when many of these companies give very bullish forecasts just to come before the end of the quarter and give a warning that the growth is not as much as what we were expecting. My guess is that a lot of discretionary spending will start getting re-evaluated in the US as their economy slows down as the impact of higher interest rates, liquidity, sentiment change starts flowing in and it is a very over-owned sector.

Some of the large midcap companies form a part of the top five, seven of all large midcap funds. I think the risks are more on the downside, rather than upside at this stage for technology, especially midcap technology.