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Capital Market FAQs

In light of COVID-19

A Sharekhan FAQ document to answer general capital market queries for existing
investors, traders and also for people looking to start their investment journey

Answered by
Mr. Gaurav Dua, Head, Capital Market Strategy, Sharekhan Ltd.
Mr. Sanjeev Hota, Head of Research, Sharekhan Ltd.

For those who have already invested in the markets

Q. 1: How much lower can the markets go?

Ans: Honestly speaking, it is practically not possible to predict market bottom. This is especially so in the current crisis as the world has never seen an event quite like this before and
we are currently in unchartered territory with the spread of COVID-19 creating more uncertainties in the market.

Given the uncertainties, volatility is likely to prevail in the near term. For a more comprehensive view on important levels on Nifty and the technical set up, refer to our detailed
technical analysis report on Nifty, which incorporates periodically updated views on Nifty and Bank Nifty.

It is important for investors to stay calm during this period of uncertainties and assess their existing holdings and risk appetite. Having a well-diversified portfolio that fits your risk
portfolio should be the focus. In our market strategy report (tap to view 2020 – A Virus Story: Anatomy of a Bear Market) we have suggested three distinct portfolios for investors
depending on risk profile and investment horizon.

Q. 2: What are the top recommendations and why?

Ans: Refer to this special report, where we have identified 11 quality companies to be accumulated in the current volatility.

These are carefully chosen high-quality companies that are leaders in their individual space, have healthy balance sheet and a proven track record.

Q. 3: Which sector will be the hardest hit and which sector can do well in such times?
Ans: As the battle against COVID-19 rages, our study reveals that sectors like Consumer Goods, Pharma, Telecom and Utilities would be less impacted and among the first to recover
after the pandemic eases. Similarly, discretionary sectors such as Aviation, Automobiles, Capital Goods, Travel/Tourism, Real Estate and Hotels among others would be severely affected
by the lockdown and will face a long road to recovery. Further, the Banking and Financial sectors are also highly vulnerable owing to low business activity.
For further information, refer to this special report on the potential impact of COVID-19 on each sector and the winners and losers.

Q. 4: With no business happening during the lockdown, how do you say that companies will do well in future and prices will go higher?
Ans: The COVID-19 crisis will hamper most businesses. But some of the businesses would not only survive but emerge stronger due to their balance sheet strength, market positioning
and high-quality management team. Once the crisis settles down, they will be the first to revive and shine. It is only in the tough times that boys are separated from the men. We have
identified 11 such quality companies for investors to accumulate in the current volatile times. Tap to access this exclusive report.

Q. 5: How would you project your market view over the 3-month, 1-year and 3-year perspectives?
Ans: Technical Analysis studies can give some idea about the important levels on Nifty in the near term. Tap here to refer to our outlook on Nifty and Bank Nifty based on technical
analysis.

Fundamentally, the lockdown and disruptions would severely impact the economy and businesses in the year 2020. However, the markets have also corrected sharply with valuations
correcting to lows seen during the 2008 financial crisis in terms of market-cap-to-GDP and price-to-book-value. Moreover, governments and central bankers globally are taking aggressive
measures to support the economy and ease business concerns. Historically, post deep correction of over 40%, the markets have given handsome returns over the next 1 to 3 years. And
this time should not be any different.

Q. 6: What should be the correct allocation of debt, equity, bullion and cash in the current situation?
Ans: Asset allocation is more a function of your age, income, risk profile and financial goals. For risk-averse investors, we have created a Safety First Portfolio that has substantial
allocation of fixed income (debt mutual funds) along with some equity exposure through balanced funds and around 10% in gold. As a thumb rule, we also suggest 10-12% in cash or
liquidity assets in these uncertain times. You could also refer to the three mutual fund portfolios given in this special report to help investors with different risk profiles to build portfolios
having allocations across asset classes.

Q. 7: With so much defaults and crisis, the rates are bound to go up and FD may become more attractive than equity. Why do you still
recommend buying equity?
Ans: In fact, it is the other way around. RBI has recently cut policy rates sharply and infused Rs 3.74 crores of additional liquidity in the system. The interest rates on small saving
instruments like PPF, NSC and others have also been reduced sharply recently. Globally, too, central bankers are adopting an accommodative monetary policy. Banks have responded
with cuts in interest on saving accounts and fixed deposits. On the other hand, equity returns can be volatile in the near term but does offer potential for much higher returns in the
medium to long term. Thus, a part of allocation should be to equities to generate decent returns on your overall investment portfolio.

Q. 8: The whole world seems to think that cash is king and you taking a contrarian view. Why?
Ans: We have always suggested 10-12% allocation to cash and liquid assets apart from allocation into fixed-income instruments depending on your risk profile.

You could also refer to the three mutual fund portfolios given in this special report to help investors with different risk profiles to build portfolios having allocations across asset classes.

Q. 9: Is this the time to go bull on mid-cap companies?

Ans: It depends on your risk appetite and investment horizon. As a thumb rule, a very high exposure to mid-caps or small-caps is not advisable in volatile markets. In fact, we always
advise a healthy mix of large-cap and mid-cap while building a portfolio. Also, even in the mid-cap space, it is important to get into only quality companies at reasonable valuations. We
have identified 11 companies (a mix of large-caps and mid-caps) that can be accumulated in the current volatility. Tap to access this exclusive report.

For those who want to start investing

Q. 1: What’s happening in the markets right now? Has it happened before? How and when will it recover?
Ans: Financial markets are in turmoil globally due to the outbreak of the COVID-19 pandemic and its fallout on economic growth and businesses. Deep corrections have happened in
equity markets earlier too. However, as seen in the 2008 Global Recession debt crisis and the 2000 DotCom bubble burst, the equity markets eventually recover and give handsome
returns post deep corrections.

Honestly speaking, it is practically not possible to predict market bottom. This is especially so in the current crisis as the world has never seen an event quite like this before and we are
currently in unchartered territory with the spread of COVID-19 creating more uncertainties in the market.

Given the uncertainties, volatility is likely to prevail in the near term. For a more comprehensive view on important levels on Nifty and the technical set up, refer to our detailed
technical analysis report on Nifty, which incorporates periodically updated views on Nifty and Bank Nifty.

Q. 2: What are the things, news, talk-points to watch out for as a new investor in this market scenario?
Ans: Successful investors avoid all the near-term noise and focus on long-term investment goals. It is a dynamic world and trying to analyse all the information is practically not
possible at an individual level. Thus, the focus should be to identify few good-quality stocks and accumulate them in these volatile times for handsome gains over the medium term. We
have identified 11 such quality companies for investors. Tap to refer to this exclusive report.

Q. 3: I don’t invest. Is this the right time to start? If yes, how?

Ans: Volatility is an investor’s friend. That’s because it is only in tough times that good companies are available at reasonable price points. Thus, this is a good time to invest. However,
one should do it in a gradual and phased manner. We have given a basket of quality companies and mutual fund schemes that investors can buy through a systematic investment plan
(SIP). Tap here to view SIP stocks / mutual funds given in our market outlook report.

Q. 4: Is it a good time to buy or wait?

Ans: We have seen in the past (during the Global Recession of 2008-09 and during deep corrections in 1994-95 and 2000-01) that financial crises present a fantastic opportunity to buy
stocks for patient and long-term investors. So, it’s important to remember that the current pain is temporary in nature and will diminish going forward.

So, the right answer to your question is to do both. You should stagger your investment over the next few months and it would help you to beat volatility and create a strong long-term
portfolio.

Q. 5: Is this a good time to withdraw from EPF and invest in equity?

Ans: Going by the basic rules of investing and financial planning, this would be considered as a risky idea. The Employee Provident Fund (EPF) is a corpus for your old age, where the
government offers interest with tax benefits. On the other hand, equity investments should be done through the savings from your monthly regular income.

Q. 6: How to identify companies with strong fundamentals during this crisis? What are the things to look for in a company if you’re just
starting to invest?
Ans: Doing your own research requires certain skills and a considerable amount of time. Thus, we suggest taking professional advice on your investments. We, at Sharekhan, have a 12-
member-strong Fundamental Research team with combined experience of more than 100 years and we cover close to 175-180 good-quality companies. Our research is easily available
on our website (optionally, you can get it on an email through a free subscription) for our clients. We also have made model portfolios for investors with different risk profiles and
financial goals that can be effectively used by you. Refer to our COVID series reports:
• 2020 – A Virus Story: Anatomy of a Bear Market
• Opportunity in Adversity
• Special Mutual Fund Report
• India Inc's Health Report Card

Q. 7: How reliable are public and private sector banks for investments over a 3-month, 6-month or 12-month perspective?
Ans: We have been positive on private sector banks and cautious on public sector banks for a number of years now. And there is no change in our broad view. However, even within
private sector banks, one needs to be very selective given the current disruption in the economy and businesses that would have twin impact on banks: one in terms of sharp slowdown
in advances/loan growth (core business) and the second being the possible rise in bad loans (or NPAs). So, within private sector banks, we prefer well-managed banks with a healthy
balance sheet like HDFC Bank, Kotak Mahindra Bank and ICICI Bank. These banks can offer decent returns in the next 12-18 months but can remain volatile in the near term.

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