It is a tough time to be an equity investor. Fear of Coronavirus pandemic spreading has pulled down stock market valuations across the globe.
The Big Fall
While the Indian stock market has partially recovered from its lows, NAVs of large-cap equity funds are still down by about 29%, on an average, in a month, while its benchmark S&P BSE 100 TRI (Total Return Index) is down even more by 30%. In all, 72 per cent of large-cap funds managed to outperform the benchmark index during the month.
A silver lining in the cloud
About 37 per cent and 60 per cent of large-cap funds managed to beat the index returns over a five- year and 10-year period respectively. In the process, many gave inflation-beating returns to their long-term investors, despite the recent market correction (see table). It underscores the importance of a hands-on approach to investing and the key role of active equity fund managers.
While revenues of these companies might not grow at a fast clip as a midcap company, many are highly profitable. With mature business models, the cash generated from profits of large-cap companies is also distributed back to shareholders in the form of dividends.
For the Turbulent times
Large-cap companies have among the highest market capitalization listed on the stock exchange. They are usually business leaders exhibiting greater ability to withstand economic or geopolitical shocks. With higher pricing power and customer loyalty, they survive multiple market cycles. HDFC Bank, Reliance Industries, Infosys, ITC and Larsen and Toubro are among the top companies in the BSE 100.
While revenues of these companies might not grow at a fast clip as a midcap company, many are highly profitable. With mature business models, the cash generated from profits of large-cap companies is also distributed back to shareholders in the form of dividends. In a volatile market scenario like now, companies with a consistent track record of distributing dividends are a safe bet.
If you are planning to invest into equities at this juncture, bluechips can bring the much-needed stability to your portfolio. Large-cap equity funds that invest predominantly into bluechip stocks have proved to be the best bet during weak phases of the market. In the last month, when large-cap funds were down by about 29 per cent, midcap and small-cap funds were down by 33 and 40 per cent respectively. Even in 2008, when the global financial crisis rocked the equity market, BSE 100 was down by 55 per cent as compared to 67 per cent and 72 per cent for BSE mid-cap and BSE small-cap respectively.
Back to the average
In the last two years, share prices of BSE 100 companies ran up on mere ‘growth expectations’ than actual performance. The earning of the BSE 100 index is currently at the same level as it was two years ago. Technically, the share (or index) price returns of a company, or index, are commensurate with the growth in earnings.
However, in the past two years, share prices of BSE 100 constituent companies moved up without a commensurate increase in earnings. In the process, index values went up, while Price-to-Earning (PE) Ratio of the index got inflated. Higher the PE, higher is its valuation. And with the recent fall, the PE ratio for the BSE 100 index has come back to its long-term average values. (See chart).
Bluechip companies are usually business leaders exhibiting tremendous ability to withstand economic or geopolitical shocks. Large-cap equity funds that invest in these bluechips are better suited for turbulent times like now. Ensure you have this cushioning in your portfolio.