August 17, 2021

Understanding Technical & Fundamentals can generate Alpha for your clients

Venkatesh Puthige

Founder, Go Financial Plan

We always have a conversation around “Higher the Risk Higher the Returns”. Sometimes, returns should be attributed to taking higher risks; it need not be true always. I would like to share 3 instances where we understood some key factors in technical and fundamentals and took a call for our clients to generate better returns without taking a high risk.

1) Classic case of the oversold sector

During March 2020 markets had sharp corrections; Nifty fell to 7500 in March 2020 from the peak of 12200 (38 % down), so did Bank Nifty which fell to 17000 in March 2020 levels from a peak of 32000 (46% down). Around October end 2020, Nifty recovered to 11900 (Just 3% below) all-time high levels (12200), whereas Bank Nifty was still hovering around 23000 (still 38% below) all-time high levels (32000). Bank Nifty and stocks in that sector were relatively cheap and we took a call to switch some debt funds to BANK NIFTY Index funds, then the results of Kotak bank announcing that NPA’s are lower than provision acted as a trigger, and within the next 3 months, bank nifty reached 32000.

Our analysis was, “one of the biggest contributors to nifty and the economy was banking sector” and it was 38% lower than all-time high and whereas nifty was just 3% lower than all-time high. This anomaly will correct very soon and we took the call to create alpha for our clients.

2) Just before the Budget on Feb 1st, 2021

Right before the budget, it was clear that the fiscal deficit will be very high for FY 21-22 as Government expenditure will be high due to COVID. The Government needed to generate income from other sources or increase the taxes. PSU sector disinvestment was one easy option for the government to bridge the fiscal deficit. Chances were high that the Government would announce in the Budget.

Also, the PSU index at 5732 was at lower levels around Jan, 27th 2021, from the peak of 7000 in Jan 2020. This was a relatively low-risk opportunity to take and there were some PSU Mutual funds through which we gave a call to our clients to park some funds. The budget announcement of PSU disinvestment rallied the PSU index to 7200 levels in the next 45 days. Again, we could generate alpha for our clients through this timely call.

3) Technical change that happened in the calculation of Nifty P/E (Price to Earnings Ratio)

The Nifty P/E is calculated by the formulae: Total free-float market capitalization/Total float profit after taxes of nifty 50 companies for the last 4 quarters. The profits here used were standalone profits. Whereas, in developed countries, it was consolidated profits.

From March 31st, 2021 NSE decided to shift to consolidated profits while calculating the Nifty P/E. To understand the effect of this change in the calculation, NIFTY was 14845 on 30th march 2021 and P/E of 40.4, and on 1st April 2021, Nifty was 14867 with a P/E of 33.6 Nifty P/E fell around 17% without a change in the price of Nifty because 39 companies out of 50 nifty companies had Higher consolidated profits than standalone profits.

At this time, we were also thinking to rebalance our client’s portfolio from Equity to Debt. But, when we understood the reconstruction and future discounting of P/E, we changed our strategy. We rebalanced to Dynamic/ Balanced Advantage fund instead of Debt funds. From that point, nifty reached 15900 in 3.5 months generating alpha for our clients.

In our conclusion, we would say, calculated risks by understanding the dynamics of the market will give you more risk-adjusted return than blindly following the rule “High-Risk High Return”.