Capital Conservation Key to Survive the Turbulent Market Conditions

Capital Conservation Key to Survive the Turbulent Market Conditions

?Long Term Investment Outlook and Portfolio Diversification the Mantra for Present Market Conditions.

?High Inflation, the biggest concern for Central Banks around the world and RBI resulting in increase of interest rate in India thereby moving away from a low interest rate regime which was one of the most important pillars of growth for the Indian economy and a market rally across asset classes around the world.

?The stock markets and other asset classes around the world have corrected to a large extent. With the Dow at 52 week low, Dollar Index at 113, Crude down to USD 85/ barrel, UK bonds in a meltdown, the Indian markets have been very resilient and have not cracked to a large extent. Every time the markets seems to be going down a fair and substantial return in the Indian market is witnessed.?

?With high inflation and a big fear of recession in the US economy, some of the results from leading consumer and technology companies have been very disappointing thereby indicating that the growth in the present year will be very difficult to get thereby putting a lot of pressure on the valuation of these companies; hence resulting in a big sell-off across the Board especially technology stocks. The Indian stock markets have reacted in a similar manner, with technology stocks facing a major sell-off.

?The volatility in the markets have increased to a large extent and there are wild swings in the stock market and for the first time in the last 24 months investors have faced this kind of wild price action movement with the markets clearly trending downwards and in a firm Bear market grip. The biggest fear of the present market is that a large number of investors are first time investors that have never witnessed a Bear market. Hence fear and panic in a rather volatile and sharp bear market may result in a big sell-off from these small investors. Approximately 4 crore new Demat accounts have been opened in the last 18 months. These are small investors who have invested small amounts like INR 40,000-50,000. In solitude these amounts seems very low but at the holistic level this results in almost INR 200,000 crores which has moved to the Indian stock markets.

?It is extremely important for investors to understand the dynamics of a Bear Market.

?Bear Markets could be of the following types:

?·??????Cyclical Bear Markets?are associated with a normal business cycle fluctuation, mainly driven by interest rate cycles which are governed by the Central Banks.?

?·??????Structural Bear Markets?occur from major bubble correction or economic imbalance. Like the one witnessed in 2008. These types of bear markets are usually associated with a steeper sell-off, increased depth of impact as well as a far longer-length time horizon for recovery.

?·??????Event-driven Bear Market: These are bear markets as a result of specific event like 9/11, WWII, present Russian Ukraine War. In these cases, the markets react to a specific event and may fall fast and sharp but last for a relatively limited duration.

?It is extremely important for investors and traders to understand and get a feel of the kind of bear market at present in order to position their trades and strategy accordingly. Alongwith the kind of bear market what phase of the bear market is one in is also very important to understand.

?Bear markets are mainly in three phases:

?·??????Phase 1: High Prices, very high investor participation. Towards the end investors beginning to book profits and exit.

?·??????Phase 2: Sharp fall in prices, earnings of companies tend to fall, and overall macro indicators look very poor. Large number of investors begin to panic and overall sentiment fall, and a lot of panic selling takes place. Often referred to as a phase of capitulation.

?·??????Phase 3: Speculative phase where prices rise and high volatility with relatively high trading volumes.

?·??????Phase 4: Prices drop but at a very low pace. New investors tend to spot value at the market levels and take fresh investment positions. The end of the Bear phase and a new Bull market slowly takes shape.

?In order to survive and thrive in a bear market, investors need to follow discipline in investing and trading and follow the following principles:

?·??????Don’t Buy on Rumours and Sell on News: Retail investors fall prey to this and have lost money in most cases especially when there is a rumour of an acquisition or merger with companies. In a Bear market there is a lot of corporate action and investors should not act or react on every such news and take trading or investment positions in a hurry on such news.

?·??????Asset Allocation one of the most significant factors: A well-diversified portfolio across asset classes is the key to wealth creation in the long term. If one asset class goes down the other asset class will help hedge or minimize the overall loss at an overall aggregate portfolio level.

?·??????A good company remains good even if the stock price is corrected by 25-30%: Don’t panic and sell in a hurry. A good company performing well in terms of ROE (Return on Equity), ROCE (Return on Capital Employed) and other operational parameters and run by a good and a capable management is still good if it has corrected 25-30% and investors should still buy the stock.

?·??????In a Bear market always invest Bottom up: In Bear markets identifying sectors may not work. A good company in an average performing sector is far better than an average company in a good performing sector. Identification of the company is the key.

?·??????Low Beta stocks are far better than high Beta stocks: Beta being the relative measurement of the stock in the broader index, in volatile and turbulent markets which are in a correction mode low Beta stocks are far better and safer as they help in wealth conservation in critical times.

?·??????Take advantage of strong rebounds: In a bear market, as declines are sharp, so are rebounds and bounce backs. Markets don’t keep falling always, they fall sharply and rebound back as well. Investors should not think that the strong rally on a particular day or for a few days indicates the end of the bear market, rather it is a strong rebound / pull back that the markets witness in a Bear market. Traders should take advantage of these kinds of strong bounce backs.

?With the stock markets in a Bear grip right now, investors should be cautious and look at conserving capital in these turbulent times and look at buying into fundamentally good companies on every dip and most importantly not panic and sell, as the long term prospects of the Indian economy are very bright and lot of wealth creation will take place in years to come and the present phase should be considered as a short term worry in a long prosperous investment journey.

?The key in these turbulent times is appropriate diversification across asset classes, Debt, Equity, Real Estate via the fractional ownership route for retail investors, REITs. Investors should have a minimum investment outlook and tenure of 36 months and not panic. The meltdown in certain sectors like IT across the globe have resulted in Indian IT companies correcting to a large extent. The price could be of a concern in the near term but in the medium and long term the Indian IT companies are world class and one of the best in the world and hence will rebound in terms of stock price and overall financial performance and numbers.

?Dr. Farzan Ghadially.