Risk-Reward To Be In Favour Of The Investor

The virus pandemic, amongst many other things, has definitely created two extreme schools of thought about the direction of the market. Each thought is supported by strong conviction and belief. One says that the markets are on the rise again and you should not miss the bus while the other advises staying away and waiting as the markets are likely to drop drastically like they did in March. So, as mentioned earlier, we would like to wait till early July to take stock afresh and decipher the writing on the wall.

Meanwhile, one thing that is fairly clear is that governments will not allow a drastic fall like before. As and how needed, they will actively step up on the stimulus. Therefore, all in all, a severe downside appears to be fairly protected. The recent market rise in the past two weeks is not owing to any improvement in the economy but primarily on account of the liquidity pumped into the system by the stimulus. Western countries appear to be well-supported by large dole packages while our government lacks that kind of muscle power.

However, there are two areas that we as the DSIJ family would like to request Finance Minister Nirmala Sitharaman to consider. The objective is to have the private sector lending a helping hand in bringing liquidity back into the economy as well as encourage people to move their savings from non-productive assets to productive areas that can fuel the economy. Hence, the government should consider:

✔ Dropping the tax applied on companies wanting to buy-back their shares. Presently, there are many companies that have substantial reserves and would like to buy-back their shares when their price has been quoting so low. However, the current tax is discouraging them. With the tax gone, these companies will end up giving back money to investors from their reserves.

✔ Removing the long-term capital tax. We need more money being invested into the economy as equity rather than debt. With this tax gone, there will be more people wanting to move their savings from low yielding asset classes into equity of companies that in turn will fuel expansion and growth.

In the cover story this issue, we have analysed the Q4 results that appear to have been impacted by the pandemic. There are some clear winners this earnings season and we have highlighted them. In one of our special reports we have analysed the performance of PSU stocks and have discussed whether most of them are value buys or simply value traps. In another special report we have covered the strategy on how to benefit from rising commodity prices and diversify your portfolio at the same time. 

All in all, investors can take solace from the fact that the governments are going to protect the downside. So, the risk-to-reward ratio appears to be in favour of investors. Continue with the staggered approach of investing that we have been advising since the past three months. Good times will eventually come! 

RAJESH V PADODE
Managing Director & Editor