December 2020: 2020 – a year of great volatility

The calendar year that went by, was packed with surprises and perhaps is the reason why some investors view the stock market with a sense of fear. The Nifty fell nearly 40%, from its high of 12,430 in January 2020 to its low point of 7,511 in March 2020. Then, from its low point, the Nifty rose 86%, closing up 15% for the calendar year 2020. In the same period, the S&P 500 Index in the US also fell 34% and then has risen 67% from its lows, closing up 15% for the year. Our portfolios have also done fairly well during this period, both on an absolute basis and relative to the market. The sharp fall was triggered by the rapid spread of Covid and the lockdowns, but the subsequent sharp recovery also took most investors by surprise. We have seen similar corrections in the past – in recent decades they have been occurring at a frequency of once in 8-10 years. In the early 2000s, around the dot-com crisis, the Nifty fell nearly 53% from its peak. The fall was even more severe during the global financial crisis of 2008, when the Nifty fell 64% from its peak levels. Apart from these extreme moves, there have been several smaller corrective periods. Eventually the market recovered from these falls and currently trades at an all-time high.

The question that constantly plagues investors is whether one should try to foresee such corrections, or the subsequent recovery, and should one have taken corresponding actions. Timing the market consistently is very difficult. The sharp recovery in the market since March has certainly got us and many others surprised. As investors, we believe in staying focused on the business of our portfolio companies and their valuations, rather than respond continuously to macro-economic events, which to us, seems not only difficult but almost impossible.

We invest in companies which have a proven track record of profitable growth, have weathered several economic cycles in the past, are operating in simple businesses and we try to buy them when they are trading at reasonable valuations. What surprised us over the last 9 months, since the Covid related lockdowns started, is the resilience of these companies. In the quarter ending Sept 2020, the top 10 companies in the portfolio grew revenues by 6.9% on the median, compared with a fall of 4.0% in nominal GDP. We expect the quarter ending Dec 2020 also to be stronger for these companies, relative to the broader economy. We have not seen any of the portfolio companies seeing either a sharp fall in revenues or struggle with a stressed balance sheet. As investors, if we can consistently pack the portfolio with highly profitable companies that can grow better than India’s nominal GDP and buy them at reasonable valuations, over time the results will show. Some companies have a track record of navigating crises well, and as investors there is merit in concentrating your investments around these companies.

The sharp recovery in the portfolios, since the market correction in March was assisted by a combination of factors. Firstly, the Indian market is benefiting from strong inflows from foreign investors. FIIs have invested nearly $20bn since May 2020. Secondly, corporate performance, especially for the companies in the portfolio, have been reasonably good given the context of an extended lockdown. Thirdly, valuations for many of the portfolio companies were not too expensive at the beginning of the year and many of them have benefited from an upward rerating in valuations. Even going forward, investment decisions in the portfolio will be based on the prospects for the individual companies and valuations at which the stocks trade. We have found this disciplined approach to be effective and can lead to superior results if followed consistently.