The markets are volatile: What should investors do?
In the Greed & Fear newsletter, Jefferies’ Christopher Wood said that while both China and India are facing issues, inflation is a bigger problem for India. “China currently has some problems, inflation is not one of them… Inflation, however, is becoming more of an issue in India where CPI has now been above the Reserve Bank of India’s threshold of 6 per cent for the past three months. CPI in March was 6.95 per cent YoY, the highest figure since October 2020.”
And, since the Russia-Ukraine war is showing no signs of settlement, the volatility has escalated in Indian markets. Both the benchmark indices- BSE Sensex and NSE Nift- have corrected over 14% from their lifetime highs earlier this calendar year. Reasons for the market correction may be attributed to geopolitical tensions, high inflation, subsequent rising bond yields, aggressive selling by FIIs, rise in crude oil prices, and an appreciating USD. India is not alone in this correction. US stocks have fallen sharply as well, with US benchmark indices correcting on an average between 10-15% from their highs in Jan-2022.
Global markets have experienced such corrections in the past war-like situations and had recovered subsequently. In every war situation in the past – be it the 9/11 attack, Kuwait war, or Korean war- equity Indices had corrected on an average by around 10%-15% and had recovered by 20%-25% in the next six months.
According to analysts, the market correction should be looked at as windows of opportunity. In the past, whenever there has been a deep correction in the market, the indices have jumped back to their previous levels and more, in the period just after the correction.
Table by Azuke Strategies
Use the dip to buy stocks with strong fundamentals
“Investors should buy stocks with strong fundamentals, impeccable management, and having profitable businesses. More importanly, they should avoid fresh purchases in Mid and Small-cap segments and only buy in tranches. From a sectorial perspective, investors should add BSFI, IT, and infrastructure stocks. Gold can be added but it should bot be more than 5-7% of the portfolio to absorb market volatility. In general, people should maintain 10%-15% in cash and exit stocks where long-term prospects do not look promising. One’s SIPs should not stop, ” said haitali Dutta, founder, AZUKE Personal Finance Advisory.
Get rid of low-quality stocks
Another sound advice is that investors should use the correction to get rid of low-quality stocks in their portfolio and accumulate good quality stocks.
“investors must stay away from companies that lack any fundamentals, penny stocks, and overvalued/news-based stocks and invest in quality companies that have good growth prospects, competitive advantages, and reasonable valuations,” said Parth Nyati, founder, Tradingo.
Avoid lump sum investments till volatility settles
“It has proven time and again that those who panic and exit when the market is volatile suffer the most. At the same time it’s advisable to exit penny stocks and those with weak fundamentals since they may not recover easily,” said Achin Bhardwaj, Executive Director at Client Associates, a private wealth management firm. Other two notable points that investors must follow, according to him, are:
1. Sips and staggered investments should be continued while lump sum avoided till volatility settles
2. Young investors should have long term orientation and continue investing primarily in equity; while those nearing retirement should pause aggressive equity allocations
Review your asset allocation:
If equities have fallen sharply over the past few months, then it is likely that the percentage allocation to equities in the overall pie has also gone down. “Reviewing this mix regularly and rebalancing it back to the target is a prudent and healthy way of keeping the portfolio in shape over time,” said Rishad Manekia, founder of Kairos Capital.
Second, we hear a lot about not trying to time the market and staying invested for the long term. However, the ‘long term’ is different for each person. “When keeping a specific financial goal in mind, it is important to have an idea of both the money value and the time horizon of the goal. If an investor has a financial goal that is due in the next few years, then it would be important to look at his/her targeted corpus and reevaluate if it needs to be reworked.
Markets can go up or down. If the markets go up, then the investor could have an even higher portfolio value. However, if the markets go down, the investor will have missed out on a chance to realize some of the gains that have brought him/her closer to their financial goal. If the time of the financial goal is coming up soon, the investor should carefully consider whether the risk of volatility of the market is worth the risk of not meeting his/her financial goal,” added Maneka.
In short, trying to predict and time market movements is a strategy based on hope and fear and things that are out of the investor’s control. Whereas asset allocation and linking investments to financial goals are far more quantitative metrics that are in the investor’s control. This is key when thinking about making changes to the portfolio.
Exit low-yielding debt products:
With the interest rates rising, investors can also look at exiting lo- yield debt products and getting into higher yield products with the short to medium-term maturities. “However, if your need is long-term and you need to buy long-term debt products like bonds, it is better to wait for a few months. With the indications of another few rounds of a rate increase by RBI, the yields will spike up further in the next 2-3 quarters,” added Dutta.
Taper down expectations and invest in a staggered manner
The current market is falling relentlessly and has breached the 16000 mark. “This market is not meant for the faint-hearted as further fall is possible and there will be no respite on the volatility front in the short term. Investors especially the ones that have entered during the post covid bull market, have to taper down their expectations. Gone are those days when any stock would rise 10% in a week or 30% in a month or 5 times in a year!! However, the current dip provides a good opportunity to add stocks and India is currently in a better position in terms of economic strength compared to its peers in the medium to long term. One of the best times to invest in stocks is during market falls and uncertain periods. The current scenario, where the environment is full of uncertainty and negative sentiments is very good to invest in as the risk to reward ratio has turned favorable. However, we recommend investing in a staggered manner and using buy on dip strategy,” said Santosh Meena, Head of Research, Swastika Investmart Ltd.
According to Nitasha Shankar, Head – PRS Equity Research, YES Securities, true value for investors in the current scenario lies in sectors like clean energy plays like electric vehicles and components, green energy shifts; sectors like banks that have cleaned up their books and have leveraged technology to enjoy the next leg of growth.
“Investors should focus on what they need to do rather than worry about what the stock market is going to do. And what should an investor do? Well, he should remind himself that many good quality Indian companies are going to create new profit records 5-10 years from now and hence, he should stay invested in them. On the other hand, he should avoid companies in weak competitive positions and poor balance sheets no matter how much their price has fallen from the top,” said Rahul Shah,Co-Head of Research at Equitymaster.
So, during a market decline, should we add a new position or buy more of what we already have?
The answer depends on the comfort level and the kind of investing one is practicing.
“For someone like me, I’d rather buy a new position than add to the existing one as I believe in minimising my risk through diversification. However, a concentrated investor doesn’t believe in minimising risk through diversification. He does so by knowing only a few companies but knowing them inside-out. So he would rather buy the same stock than invest in a new position that he is not at all familiar with. Both approaches should work well provided the investor who is taking a new position, doesn’t get into a poor-quality stock just for the sake of diversification. Also, the investor who is investing in the same stock should be mindful of valuations. He should not end up paying too much for his favourite stock. As long as these two big risks are taken care of by the respective investors, there are good long term returns for the taking for both the approaches,” added Shah.