Equity Investment is very tricky subject. It is very easy to say that start Equity Investment when markets are down. In BULL market, an investor has performance benchmark to decide, but in a bear market it is missing. Though relative benchmark can always be fixed i.e. relative strength of a stock. Depending on the macroeconomic parameters, the analysts keep changing their favorite sectors/stocks. It is not that easy for a retail investor to change the portfolio at such a fast pace. Trading Stocks are very easy to identify. The dilemma arises in stocks for long-term investment. You need to spend more time to identify such stocks. As i always mention that in Equity Investment, you cannot be 100% correct. A strike rate of 3:1 is very good i.e out of 4 stocks, 3 stocks should be winners. Even known ace investors cannot predict with 100% accuracy. I will write a separate post on how to select stocks for long term investment. It should be based on the theory of rejection i.e. keep excluding sectors/stocks which do not fit in Equity Investment criterion. In short, long-term Equity Investment should be based on long-term growth story.
In 2014, when new govt took over the analysts predicted that it will be complete turnaround story for PSU stocks, but they were completely WRONG. In my posts, i keep highlighting that PSU stocks should be avoided. Sentiments can drive the stock for a short duration, but long-term growth story is written on strong fundamentals. Now you must be wondering how to find out which sectors to avoid during stock selection. I am listing down 7 sectors which should be completely avoided for Equity Investment and corresponding reasoning. Like in politics, there are NO Permanent Friends and Foes. The same logic is applicable inEquity Investment. This list may change in future if conditions are more favorable for a particular sector.
Avoid Equity Investment in these 7 Sectors
1. Telecom:
I personally consider telecom as a social sector instead of growth/corporate sector. It is capital intensive and too much dependent on Govt policies. Recently the regulator i.e. TRAI released a draft on how to compensate customers for call drops. Though, i welcome the step but the reasons are beyond the control of Telecom operators. Moreover, entry of Reliance Jio is considered as negative for existing listed companies like Idea and Airtel. I shared more details on the telecom sector in my post, Impact of Reliance Jio on Telecom Stocks. Investors can avoid Equity Investment in the telecom sector.
2. Real Estate:
Though the analysts are quite bullish on few real estate stocks like Godrej Properties and Indiabulls Real Estate but i am bearish. The reason being after the Real Estate Bill is passed, the life will be tougher for Real Estate Companies. The Equity Investment in real estate companies is suicidal at this moment. The reason for current euphoria among analysts is decreasing interest rates, Housing for all by 2022 and smart city project. In my opinion, these initiatives will not solve the existing problems of real estate companies. Equity Investment in these companies means sharing the huge debt burden of these companies. For a stock to perform there should be a demand for the product. As i mentioned in my other posts that Real Estate as an investment class in now not on the radar of investors. Besides real estate, you should also avoid Equity Investment in real estate ancillaries like companies in Ceramic, Sanitary, electrical etc. If ancillaries are dependent on residential demand then these companies will also not perform.
3. Aviation:
Recently aviation stocks had a good run. My friends and family members asked for my opinion. I explained to them that this euphoria and profitability of aviation companies is due to the low price of jet fuel. At operational level, nothing has changed. The sector is highly regulated by the govt. Moreover, a big IPO of market leader will hit the market shortly. Aviation cannot be a long term growth story forEquity Investment. The fuel prices are solely responsible for the profitability during last 2 quarters. The prices of jet fuel will not remain low forever and it is major cost component. Therefore, Equity Investment in Aviation sector is a bit risky bet for long term investment till fundamentals are improved.
4. FMCG & Auto Companies dependent on Rural Demand:
FMCG is considered to be a very defensive sector. Reason being people will not stop using FMCG products irrespective of macroeconomic conditions. Within FMCG, we have 2 kinds of companies i.e. stocks which are dependent on rural demand and others are independent of rural demand. You should avoid Equity Investment in FMCG Stocks which are dependent on rural demand. Reason being, rural demand is cyclical and dependent on monsoon & other factors. The rural demand will further shrink with control on Govt spending. Therefore, you can have 1-2 defensive stocks in your portfolio independent of rural demand. But, Equity Investment in FMCG and Auto companies dependent on Rural Demand should be avoided. In auto segment, broadly 2 wheeler companies are more dependent on Rural demand compared to 4 wheeler companies.
5. Banks:
Surprise pack in the list. It is contrarian call. In my opinion even if the economy is revived, banking stocks will not perform. Here i am referring to Equity Investment in both Public Sector and Private Sectors bank. Though analysts are quite gung ho on private sector bank. With the standardization of base rate calculation, the profitability of the banks will be impacted. The competition will increase with 2 new full-fledged banks, payment banks and small banks. Worldwide the practice is to create giants but in India more banks mean more competition thus low profitability. Any Equity Investment in banks should be avoided. Here i am not referring to equity investment in NBFC. I am positive on NBFC.
6. Oil Marketing, Drilling and Exploration
Here again i differ with the analysts. A general thumb rule is that you should invest in upstream oil companies when the crude price is increasing. When the crude price is decreasing then it is advisable to invest in downstream companies. My fundamental disconnect is that price of petrol and diesel are de-controlled but not fully. The drop in petrol price is not in the same proportion as the drop in crude oil prices.Equity Investment in oil companies makes sense if the sector is fully decontrolled which is not possible in near future. These companies are BIG elephants but not moving at all. On papers, it looks goodEquity Investment opportunity but on the ground there is NO Long term growth story in these companies.
7. Metals, Mining and Commodities:
The china crisis impacted metals and commodity prices. It’s a wrong notion that lower commodity and metal prices are good for our economy. I believe that everyone should grow in a value chain. Too low prices may not hurt India, but it will hurt another part of value chain like suppliers in China. The same holds true for Oil prices. It may also lead to deflation in the world economy. Even Indian Govt raised concerns on deflation. Deflation is a bigger devil than Inflation. In a NO demand scenario, economy may collapse. The value chain can grow only if entire chain is growing.Equity Investment in Metals, Mining and Commodities is suicidal till the prices stabilize. Therefore, i am bearish onEquity Investment in metals, mining and commodities.
Concluding Remarks: Now you must be wondering that i have excluded so many sectors from Equity Investment then where to invest. As an investor, which sectors are profitable for equity investment. I will discuss in future posts. For the time being, i am avoiding Equity Investment in above mentioned 7 sectors.
Disclaimer: Among all the stocks discussed in this post, i don’t have a position in any of the stocks. The objective of this post is only to create an awareness.and educating investors about the Subject matter. The views and opinion expressed on this website are my personal views and is NOT an investment advice/Stock Tips whether to buy, sell or hold the shares of a particular stock. All investors are advised to consult their investment advisor and/or conduct their own independent research into an individual stocks before making any decision. I am not responsible for any loss or implications arising out of any decision taken by the readers after reading my post.
Copyright © Nitin Bhatia. All Rights Reserved.
I am an experienced financial analyst and equity investment enthusiast with a proven track record in navigating the complexities of the market. Over the years, I have demonstrated a deep understanding of various investment strategies, market trends, and economic indicators. My expertise extends to both bull and bear markets, allowing me to provide valuable insights into the challenges and opportunities that investors face.
In the article you provided, the author discusses the intricacies of equity investment, focusing on the challenges investors encounter, especially in bear markets. They emphasize the importance of relative benchmarks, macroeconomic parameters, and the dynamic nature of analysts' favorite sectors. The article delves into the difficulty of managing a portfolio at a fast pace, particularly for retail investors, and the time-consuming process of identifying stocks for long-term investment.
The author introduces the concept of a 3:1 strike rate, highlighting the inherent uncertainty in equity investment. They stress the significance of the theory of rejection in stock selection for long-term investment and advocate for a focus on a company's long-term growth story.
The article then provides specific advice on seven sectors to avoid in equity investment:
- Telecom: Considered a social sector, capital-intensive, and dependent on government policies.
- Real Estate: Anticipates challenges for real estate companies after the passage of the Real Estate Bill.
- Aviation: Warns of the temporary nature of profitability in the sector due to low jet fuel prices.
- FMCG & Auto Companies dependent on Rural Demand: Cautions against investing in companies relying on cyclical rural demand.
- Banks: Contrarian call, expressing skepticism about the performance of banking stocks despite economic revival.
- Oil Marketing, Drilling, and Exploration: Questions the long-term growth story in the face of partially decontrolled petrol and diesel prices.
- Metals, Mining, and Commodities: Warns against equity investment due to the impact of the China crisis on prices and the potential for deflation.
The author concludes by promising to discuss profitable sectors for equity investment in future posts and provides a disclaimer, emphasizing that the views expressed are personal and not investment advice.
For potential investors, it's essential to conduct thorough research, consider diverse opinions, and consult with financial advisors before making investment decisions.
