The outperformers 2020

Welcome to the Mad Hatters Party a.k.a investors going overboard on 'quality' companies

The market has been behaving erratically but amid the insanity here are some sane observations 


We are delighted to present to you another edition of The Outperformers, except that our enthusiasm is muted by the fact that over FY15-FY20, the Nifty delivered a meager 0.03% return. What the market had gained over 57 months was wiped out in three months as the stock market got all jittery about the global pandemic during the first quarter of the calendar year. But after March 23, when the Nifty hit an intraday low of 7,511, it has been a dramatic recovery, with some companies bouncing back higher than others.

Barring the COVID-19 impact, what has characterized the performance of stocks over the past five years is how investors have gone overboard on “quality” companies, those with high predictability in earnings and high return on equity, versus the not-so-pretty-looking businesses. In a way it has been a self-fulfilling prophecy – since good-quality companies performed, fund managers who held them attracted more inflows, which they promptly ploughed back into the same stocks and, by virtue of that very gain, the stocks’ weightages went up in the indices, attracting even more attention from investors. 

But then, the stock market overextending is nothing new. Neither is the polarization of performance. Post-COVID, the market seems set on a corrective course with some of the good-quality names lagging in performance with the hitherto ignored sectors such as pharmaceuticals making a comeback. 

The depressed sectors in the market include core economy stocks, corporate banks and, of course, public sector companies, some of which are in good businesses that are unlikely to be disrupted. But they battle a massive perception bias because of the governance standards upheld by the promoter, the government. The same is the trouble with certain banks. With every year springing new unpleasant surprises, there is much skepticism around when they will make a comeback. 

While a lot of price destruction has happened, for value to get unlocked calls for unlimited patience, which few investors can afford. With no sign of how long the waiting period could be, will the rewards of staying invested in these stocks justify the opportunity cost of avoiding others?