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Time to stock up

Devangshu Datta

Devout Hindus, Buddhists and Jains subscribe to the theory of cyclic time. Everything in the universe is repeated over and over again. This is definitely a useful mindset for investors. For, things do repeat in the stockmarkets.

There are endless cycles of boom and bust. We are now obviously in a bust phase. The market has tanked through 30 months, the US economy has tanked and the monsoon has failed, which means that the economy may underperform for quite a while longer.

This makes it a wonderful time to invest. Before you think that statement qualifies me for a padded room in a mental asylum, consider one fact. To profit from buying and selling anything, it is necessary to buy lower and sell higher.

A recession (or even an economic slowdown), as busts are known in polite society, is defined by low stock prices. Everybody knows the bad news, and panicky sellers have already pushed prices down in reaction. The only unexpected bad news would be another major terrorist attack, or a US-Iraq war. Even those scenarios have been accepted as real possibilities by many investors.

The cyclicality now favours buyers. The longer a recession lasts, the more chance that next month will see a turnaround. Of course, we can't predict when exactly a turnaround will come, but that doesn't matter if stock prices have bottomed.

If an investor buys at an absolute low, and he can wait, there will eventually be big profits. The trick to investing in recessions is patience and common sense. Invest money that you can afford to leave stuck for a long time, and pick companies that won't go out of business.

The "eventual return" is actually likely to come within a year or two, going by statistical trends. Looking at stock price movements in the 1990s, there were booms between July 1991-March 1992, April 1993-September 1994, February 1996-July 1996, December 1998-February 2000.

If that pattern hasn't been completely broken, we should see a surge soon. Market indices like the Nifty and the Sensex usually double in value from bottoms during recessions to highs during booms. Pick the right stocks and returns will far exceed the indices.

Let's assume that you decide to invest. What are the best stocks to pick? There are many ways to do this sensibly. One method is the shotgun approach - shooting many pellets rather than single bullets. You don't know which specific stock to pick so you buy the lot. This can be done by picking up units of mutual funds, which are invested across the entire economy.

A very idiot-proof investment seems to be the passive Index fund. These are mutuals, which are invested in the Nifty and Sensex universe of stocks in exactly the same proportions as the indices. (The exact proportions vary on a daily basis as individual stock prices fluctuate.)

These index funds give the same returns as the Index they track - dividend payments compensate for the brokerages paid to maintain an exact mirror. The attractive aspect is that the indices are at 1997-98 levels, - thus giving high chances of gains. By investing now after a long recession, the index player hopes to ride the next boom.

A less diffused, common sense method is to buy businesses that will not go bankrupt easily. For example, look at fast-moving consumer goods like soap, toothpaste and cigarettes. People buy such things regardless of economic conditions.

It's true that there won't be spectacular growth in FMCGs, because most of the growth comes from rural populations upgrading lifestyles. In a year of poor monsoons, rural people won't upgrade. But that sluggishness is already reflected in low stock prices.

There is reason to believe that people are underestimating the cost savings that come from two major infrastructure improvements. The Golden Quadrilateral highway system makes it cheaper to transport goods. Lower telecom rates and better IT-enabled services mean massive savings to anyone with big inventories and national marketing-distribution.

Two other recession-proof sectors are pharmaceuticals and healthcare. The former features Indian companies trying to go MNC and sell drugs developed through R&D abroad. The latter will receive more clients as private insurance improve its penetration. Both sectors have teething problems. Indian pharma companies will be hit by patent suits, drugs will fail and be withdrawn. Healthcare driven by insurance also means lawsuits. But growth is likely, even in recession.

A third attractive play is IT. This has gone through a bad time. Scam after scam surfaced as growth dwindled. Most IT stocks have dropped 85 per cent to 90 per cent. At some stage, there will be a big rebound.

Obviously the sector looks risky since many companies won't survive the recession. It's difficult to pick the second wave winners. But there are heavily discounted technology funds. If you don't like the shotgun approach, go with size. During famines, overweight people cope because they have fat to shed. It's similar with big companies.

There is one hedge worth mentioning against the possibility of another terrorist attack or a US attack on Iraq. In those circumstances, crude prices will surge and ONGC will gain as a primary producer.

If you must go stockpicking in other sectors, there are high-risks attached. Please stick to industries with specialised personal knowledge. An auto engineer for instance, will always know more about the sector than any analyst. An IAS officer has a better idea of divestment possibilities. You can find good picks anywhere if you know what's happening. Just don't get too impatient.

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