The year 2016 so far has been shocking for the investors. First, UK shocked everyone by leaving European Union, USA elected Donald Trump as president, and India demonetised its currency. All these events were regarded as unlikely. Stocks those were looking great investment opportunities are now raising doubts in the mind. How should investors deal with this heightened level of uncertainty?

Whether investor realise it or not, they are in the business of managing risk. A helpful way to understand risk is to think about the different possible scenarios that might play out. Always remember that ‘low probability’ is not ‘no probability’.

Take BREXIT as an example, most indicator suggested that remain camp will win the referendum. The natural tendency for human being is to try to forecast what will happen. A risk manager on the other hand, will think about what could happen. So the risk manager would be considering two different worlds. Firstly, a world in which remain camp wins; and secondly, a camp in which leave camp wins.

If the remain camp wins then David Cameron remains prime minister of UK, the country remains in EU and its business as usual. In the latter world, we find ourselves in political turmoil, it will be unclear who will be the prime minister and there is heightened risk of recession and currency weakens.

kitex garment logoSimilarly, we look at two possibilities with Kitex Garment stocks. First, business as usual, they are shipping out their products to US markets and helping their own brand ‘little star’ to grow its business. The latter world is little scary but possibility, Donald Trump announces import taxes on the goods where Kitex Garment products are part of that list and thus Kitex Garment loses its competitive edge and 90% of its business is under threat. To survive now Kitex Garment will have to look at the other markets and to turn profitable it might take another 4 – 6 quarters of bad results.

Axis bank logoAnother example of such would be from banking sector, which is already in trouble with NPA issues and Axis Bank’s second quarter is a good example to understand the pain. With now demonetisation of currency in the country, there are couple of scenarios that we can think of now. Firstly, Axis bank losing track of NPA’s for another quarter or two and provisions eating up all its profits. Big amount of deposits in the bank impacting its NIM and growing threat to fresh NPA’s. The other scenario would be where they manage to control their NPA’s as well as all the deposits that got deposited in the bank during the demonetisation of currency, resulting into healthy NIM and low provisions and more profits.

Kitex Garments had fallen down below Rs 400 per share and is struggling to cross that, and Axis Bank had reacted positively so far to demonetisation. Markets always try to say something, and as an investor it is important not to forget that markets too can be wrong as many times as they are right.

What scenarios you are thinking about these two stocks? Share with us.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we tell you to take professional advice before going ahead with our views.