Navigating Volatility: Why Value Investing May Be Your Best Bet

The markets have seen a roller coaster ride ever since the war between Russia & Ukraine began. It saw sanctions by Western nations on Russia which was a bad move economically. The European nations were getting Russian gas at very attractive rates and the sanctions resulted in Russia hating Russian energy supplies to Europe & the West. The European nations had to import expensive gas for heating during winter and energy costs shot up sharply and were expensive for most users. Subsequently, after the sharp run-up in energy costs, almost all essential commodities saw a steep increase in prices. This resulted in an increase in Inflation which has resulted in the hardening of interest rates which has resulted in recession in most European countries.

  Coming back to India the Indian economy is likely to grow by 5%-6% in the medium term which is very good considering the global economic scenario. There is good visibility with tax collections being robust and lower subsidy burden due to likely reduction in Food Subsidy. The GST collections have remained buoyant and with softening of global crude oil prices there is likely to be lower import costs of crude oil which is a major import of the country. However, India was able to buy Russian oil at a steep discount to international prices which resulted in lower import costs for India. This steep reduction in the imported price of crude oil from Russia helped the government to keep the prices of Petrol & Diesel on Hold. This stability in Crude prices helped the government to tackle Inflation is in line with RBI estimates. Though RBI is likely to raise rates in the coming months it is likely to be modest and won't derail growth. However, one area of concern for India is likely to be exported which is likely to take a hit. The recessionary trends in Europe are likely to slower exports to Europe and the West which are likely to have some effect.

    The stock markets have corrected during February and March 2023 which has resulted in a sharp correction in many stocks. The correction was fairly steep in growth stocks some of which were trading at abnormal valuations. The Indian markets were also trading at expensive valuations and this correction has brought some sanity to the market. There have been some steep corrections in the mid and small-cap space and this provides a huge opportunity for long-term investors. There are many stocks that are trading at multi-year lows and have the potential to deliver 3x returns in the medium to long term. One such example of stocks trading at a steep discount is in the packaging space, particularly in the BOPP segment where realizations per kg have dropped from a peak of Rs.45 per kg to Rs.15 per KG in the latest quarter. The long-term average is Rs.25/ - per kg for the BOPP segment.

Though there has been a sharp increase in capacity by almost all the players resulting in excess capacity the industry believes that the strong domestic growth will absorb the overcapacity in about 18 months. Once demand matches up with supply realizations are likely to return at least to the long-term average of about Rs.25/- per KG which will result in rerating of the stocks in the sector which are currently trading at low single-digit PE multiple.

    So it is the right time to invest in value stocks that will deliver returns in excess of 50% annualized. These are stocks that have strong fundamentals and are currently trading at very low PE multiples. These stocks are less risky and offer superior risk-adjusted returns. I believe that investors should take this opportunity with both hands and reap the benefits of this sharp correction. It is very rare to come across such valuations and we urge our investors to take full advantage of this opportunity.

    

Happy Investing!!