Investors eye slew of domestic events amid volatility

On the back of renewed concerns over poor monsoon, RBI meeting minutes’ concern over rising inflation, rising US bond yields on the eve of US Fed Chairman Jerome Powell’s speech at the Jackson Hole and mixed global cues; Indian equity markets ended flat and extended profit booking for fifth consecutive week. The BSE Sensex was down 0.09 per cent or 62.15 points to close at 64,886.51 points, and NSE Nifty fell 0.22 per cent or 44.35 points to finish at 19,265.80 points. However, broader indices, BSE Mid-cap and BSE Small-cap outperformed and touched fresh highs during the week ended and added 1.5 per cent and 2 per cent respectively. The selling from FIIs continued in fifth straight week with sales worth Rs4,895.29 crore, while DIIs bought equities worth Rs8,495.99 crore. Till date, in this month so far, FII sold equities worth Rs15,821.13 crore and DII bought equities worth Rs17,741.85 crore. The Indian rupee notched its best week in a month-and-a-half following the Reserve Bank of India’s move to clamp down on arbitrage trades between onshore and offshore markets. According to Moody’s report on Indian economy, India’s young population, steady demand and rising spending power would keep domestic consumption “robust” at least till the end of the year, while sustained government infra spending will support business activity in key industrial sectors. During the much awaited Jackson Hole meeting, the US Fed Chairman Powell provided a classic on-the-one-hand, on-the-other-hand speech. On the one hand, the unwinding of pandemic distortions and the Fed’s rate increases “are now working together to bring down inflation.”

On the other hand, “the process still has a long way to go.” The substance of what Powell said indicated that if another hike comes, it probably won’t occur when policy makers meet next month. And his assessment that the central bank is now “in a position to proceed carefully,” suggests the Fed isn’t in a rush to do much of anything. However, risk appetite in the speculative markets has declined. Bitcoin saw a significant drop of over 10 per cent in the past week, marking its most substantial decline since the FTX crash back in November. Index heavyweight Reliance Industries’ 46th annual general meeting (AGM) is expected to set the tone for the markets in the coming week, with investors eyeing a slew of major announcements. Keep track of the Supreme Court’s hearing on Tuesday in the Adani-Hindenburg case. Volatility is expected to be high in the market with the August derivative series set for its expiry, weak global sentiment and domestic events., according to experts.

Listening Post: Want to Beat the Stock Market? Avoid the Cost of ‘Being Human’

Investing is one of the few areas of life in which amateurs can—and should—outperform professionals. The individual investors who have spent the past few years trying to beat the pros at their own game by chasing hot stocks have it all wrong. Instead, you should play a different game entirely. Evidence shows that fund managers labor under handicaps that individual investors don’t face. Those handicaps counteract the professionals’ obvious advantages over amateurs—including vast experience and expertise, powerful computers, instantaneous access to oceans of data and the ability to trade thousands of times per second. Consider a new study that looked at the returns of several stock mutual funds from 2000 through 2022. It measured their returns against those of a market-matching Nifty exchange-traded fund and the total Indian stock market. The comparisons covered monthly, annual and 10-year periods, as well as each fund’s longest track record, within those three decades. On average, only 46 per cent of funds outperformed the total market over monthly horizons; 39 per cent beat the market over 12-month periods; 34 per cent over decade long horizons; and a mere 24 per cent for their full history. Fees are part of the problem, of course. The typical fund returned an average of 10-11 per cent annually over the three decades, after fees. Fund investors, however, earned only 6.9 per cent annually because of their chronic compulsion to chase hot performance and flee when it goes cold. Such buy-high-and-sell-low behavior tends to flood fund managers with cash at times when stocks have already risen in price—and to force the funds to sell stocks after a decline. The managers can perform only as well as their worst investors allow them to. That cost of “being human,” is almost as high as the drag from annual fees.

In the long run, however, nearly all the market’s return comes from a remarkably small number of stocks—giant winners that rise in value by 10,000 per cent or more over the course of decades. Investor and financial historians call such companies “super stocks.” Research shows that less than half of all stocks even generate positive returns over their publicly traded lifetimes, and that only 10 per cent of stocks created all the net gains in the Indian market between 1990 and 2022.That means searching for the next super stocks is like hunting for a few needles in an immense field of haystacks. And professional investors, by design, can’t search the whole field and all the haystacks. Over the three, five, 10, 15 and 20-year periods ended March 31, Indian stock mutual funds holding at least 100 positions outperformed those with fewer than 50. Over all the same periods, except the past five years, the most diversified funds also earned higher returns than those with 50 to 99 holdings. If fund managers could stick to only their best ideas, they might do better. But owning just a handful of stocks could create tax and regulatory headaches—and would expose the managers to massive withdrawals (and loss of fees) if returns faltered. So most portfolio managers own too many stocks to focus on their best ideas—but this is not enough to maximize the odds of finding a giant winner. Individual investors, by contrast, can capture every needle in all the haystacks with a total-market index fund. Then you can add the potential for outperformance by trying to pick the next super stocks yourself. Unfortunately, many individual investors diversify by adding big, household-name companies too similar to what they already own, or by following the crowd into whatever’s red-hot.

Instead, search for super stocks among smaller, unfamiliar firms that have a proven ability to raise prices without losing business. Limit yourself to a handful of possibilities, don’t put more than a total of 5 per cent of your money in them and never add new money even if they go up. That way you can make a lot if you land a big winner, but you can’t lose much on the losers. If you do find what you think is a likely super stock, you—unlike a professional—can hold for as long as it takes to reap a giant gain. The word “professional” comes from the Latin for “declare publicly.” Professional investors no longer have insurmountable advantages over individual investors. They only profess that they do. In the long run, you can’t beat the pros by trading faster or by joining a meme-stock mob. The way to outperform isn’t by blending into the herd, but by standing apart from it.

Quote of the week: Discount Fundamental outlook. Never ignore fundamental conditions, and always favour the trade wherein fundamental and technical conditions cooperate. Avoid a trade wherein fundamental and technical conditions are opposed, except in cases of imminent liquidation, or overextended short interest.

F&O / SECTOR WATCH

Amidst high volatility and consistent selling pressure, the derivative segment witnessed heightened activity in select stock futures. Both the NSE Nifty and the Bank Nifty indices concluded with marginal gains with mild outperformance from the Bank Nifty. The Options data indicates maximum monthly Call open interest (OI) at 19,500 strike, followed by 19,300 strike. On the Put side, the maximum open interest is at 19,000 strike, followed by 19,200 strike. In Bank Nifty, the highest open interest was observed at 45,000 strike, followed by 44,500 strike. On the put side, the highest call open interest was noted at 44,000 strike. Moving to implied volatility (IV), call options for Nifty settled at 10.04 per cent, while put options concluded at 11.59 per cent. The Nifty VIX, a measure of market volatility, concluded the week at 11.70 per cent. The Put-Call Ratio Open Interest (PCR OI), stood at 0.82. Traders are advised to monitor the India VIX closely, as it is trading near to the support level. A rebound in India VIX could be expected in the coming weeks. Nifty’s trading range will be between the psychological level of 19,000 and 19,500. Adopt a ‘sell on rallies’ approach until the Nifty surpasses the 19,500 level. True to predictions, on the back of strong dollar, IT biggies continued to witness strong delivery buying. Contrarian buying suggested in the sector for good medium term gains. Stay invested and adds in the present weakness for steady gains in DLF, Oberoi Realty and Godrej Properties. Stock futures looking good are Axis Bank, Astral, Birla Soft, Dalmia Bharat, Mphasis, Laurus Labs and NTPC. Stock futures looking weak are ABB, Bajaj Auto, Exide Inds, MGL, JSW Steel, HDFC AMC, ONGC and RIL.

(The author is a senior market analyst and former vice- chairman, Andhra Pradesh State Planning Board)