Don't Ignore These 5 Risks to Bluechips Amid the Budget Euphoria - Views on News from Equitymaster

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  • Jan 13, 2020 - Don't Ignore These 5 Risks to Bluechips Amid the Budget Euphoria

Don't Ignore These 5 Risks to Bluechips Amid the Budget Euphoria podcast

Jan 13, 2020

In this video, Tanushree Banerjee tells how you should react to the biggest economic event of the year - the Union Budget which is going to be announced in three weeks.

Watch Now...

Here's more on Rebirth of India:

Hi...I am Tanushree Banerjee and today I am going to tell you - how you should react to the first and perceived to be one the biggest economic events of the year. Yes, I am talking about the Union Budget...that's going to be announced in another three weeks.

So, we all know that the Budget euphoria is set to grip the markets over next few weeks.

Corporates will look forward to freebies.

Individuals will look forward to tax cuts.

Investors will look forward to reforms.

And like we have seen in the past few months, any positive vibes from the Budget will encourage investors to clamour to the select few Sensex bluechips.

Now, nothing wrong in that...except for the fact that:

  • The Budget euphoria will not last forever
  • And apart from valuations there are some key risks that you should keep in mind while investing in bluechips this year.

Don't get me wrong ...I do think it will be a while before any rebound in mid and smallcap stocks impact the appetite for bluechips.

So, bluechips will remain in favour for at least a few more quarters.

Also, I do believe that select non Sensex bluechips, especially, offer attractive bargains currently.

But, instead of blindly clamouring to any and every largecap stock, thinking that they are safe insulated bluechips, you would do well to keep these 5 risks in mind.

First. The capital markets regulator is expected to enhance the definition of large-cap stocks for mutual funds' investments from the top 100 companies in terms of market cap to the top 150.

Which means mutual funds that have the mandate to invest a majority of the AUM only in largecaps will now have more stocks to choose from.

While this is certainly good news for bluechips in general, investors who are exposed to the top Sensex bluechips that have been the biggest gainers over past two years, must keep in mind that some mutual fund money could shift from these stocks ...and that means the top Sensex bluechips could shed some valuation multiples.

So just make sure that you are not overexposed to any overvalued bluechip.

Second, the US Elections are later this year. Why should that impact Indian markets?

Well, the US stockmarket is undeniably the most influential stock market in the world. And it is said that when US sneezes everyone catches a cold.

So, extreme volatility or shocks in the US stock market is bound to have an impact on global stock markets, including India. Which means stocks irrespective of the marketcap, fundamentals and valuations could be subject to such volatility. Like we saw during 2008 subprime crisis.

So, do not stay with the myth that the big bluechips are insulated from such risk

Third. Geopolitical Risks and Flight of FIIs to Safety. Now whether or not the US-Iran skirmish escalates and leads to any full-blown war, the fact that geopolitical risks are looming will keep investors, especially the FIIs very edgy. That means they will choose safety over returns. They may choose US Treasuries or gold over Indian and emerging market stocks.

So, when emerging markets like India see a flight of FII funds to safety, the valuations in pockets of overvalued stocks may see some significant corrections. And since most the money is currently parked in Sensex bluechips, they are the most vulnerable of the lot.

Fourth... A Rebound in Smallcaps is a given. It is bound to occour at some point. Of course, it is quite possible that it may not happen in 2020 but later.

Nevertheless, with money having simply shifted from smallcaps to select largecaps all of last year, any signs of rebound in smallcaps could mean correction in valuations of the bloated bluechips.

And the Fifth and Final Risk...Pressure on Profit margins of bluechips. It is not just stocks but also commodities and currencies that could end up being very volatile this year. That means even bluechip company that consume commodities such as oil or earns in US dollars could see big swings in their operating margins.

Now such earnings volatility is hardly going to help the big bluechips that are expected to be consistent performers with strong earnings visibility. And therefore, any pressure on profit margins could mean a blow to the valuations of such bluechip stocks.

Once you keep these risks in mind, selecting the best bluechips with sufficient margin of safety will keep you prepared for every contingency in the coming year.

So, do not pay too much attention to the Budget noise and do not get carried away by the Budget euphoria. Neither the Budget nor any other economic event during the year should change the way you select safe stocks.

Stay tuned for more updates on safe stocks.

Also don't forget to sign up for 5MinWrap Up, our free email newsletter, and get access to this latest guide on Picking Multibagger stocks.

Thank you.

Tanushree Banerjee

Tanushree Banerjee (Research Analyst), is the editor of Stock Select and, ValuePro Equitymaster's oldest recommendation services. She is also the editor of Equitymaster's most popular newsletter read by over 300,000 subscribers, The 5 Minute WrapUp. Tanushree started her career at Equitymaster covering the banking and financial sector stocks and scrutinising RBI policies. Over the last decade, she developed Equitymaster's research processes that helped us pick out various multibaggers, across all sectors. A firm believer of "safety first" when it comes to investing, Tanushree closely follows the investing philosophies of Warren Buffett, Jeremy Grantham, and Joel Greenblatt.

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Jan 23, 2020 03:37 PM