Falling mkts offer good investment opportunities

Falling mkts offer good investment opportunities

As you read this article, the US Fed had gone for another rate hike despite the rhetoric by the US President and may be factually not so rhetoric...

As you read this article, the US Fed had gone for another rate hike despite the rhetoric by the US President and may be factually not so rhetoric considering the dollar strength, limited inflation and possible fallout of the tariff wars; the US stock markets have gone into a bear grip and immediate future stares at a higher incidence of recession in the US and world economic slowdown.

Of course, it’s only when our immunity is down would we see prevalence of some of the inherent illnesses to prop up or show up. Similarly, now with the constant negative news flow, compounds the incremental negativity around - a very good recipe for stock market corrections.

Domestically too with the creeping uncertainty on the upcoming general elections due to the political fallout of the latest state election results, the announcement of freebies and/or loan waiver announcements that would burden the already bleeding banking which is yet to deal with their persistent non-performing assets, the overall lag in the corporate earnings and the near peaks of stock markets only pose more threat and indecision to an investor on assessing how to go forward.

One has to always remember that these situations turn out to be an ebb in the overall frame of investing and sometimes even wouldn’t form a blip in the entire investing experience. Of course, one mistake could not only just wipe out the larger corpus but would break the back in a way that it could hinder to recover again. These are the extremes, though, one has to be aware of these situations. No one could, however, built-in these kinds of scenarios of black swan events while constructing their portfolios. So, what has to be the way forward and how to approach these situations.

The only way out is thus to create a portfolio which other than reflecting your goals, timelines and risk appetite should also have the buffer to absorb some of these risks. The portfolio hence should’ve less correlated or non-correlated asset classes so that the overall returns don’t hinder much while also mitigating the overall risk. Also, these situations offer opportunity to participate in good businesses at cheaper valuations. When the market in general exhibits negativity, it leads to secular downgrade of the stocks across the board making available good stocks at a bargain.

It’s also important to stay liquid during the crisis to gain from these opportunities and have exposure to these quality stocks. History suggests that these are the stocks which bounce back first as the concerns of the crisis recedes or when a recovery takes in to effect. The other important factor that decides who wins or loses is not just the construct of the portfolio but the investor who acts in these situations. While the falling market not only presents opportunities but creates lots of fear among the investors and it becomes very difficult to take decisions. For instance, a particular stock would correct by a large percent and knowing pretty well that it’s of a great business; the continued fall and not knowing the bottom or trying to bottom fish becomes a hazard.

One needs to keep in mind that it’s difficult if not impossible to time the market and so buy only at the bottom. A study puts that since the inception of NIFTY in 1990, there were 19 instances where the drawdown was by a minimum of 10 per cent and at only three instances, these materialise to a 50 per cent fall. And in 9 of the 19 instances, the index added an additional 10 per cent drawdown i.e. a total of 20 per cent fall.

So, whenever there is a correction of such quantum, it’s very difficult to take decisions of taking fresh exposures especially not knowing what’s in store in the next moment. To sum-up, the way to approach a difficult period in market is to be have a plan of what to be done during these corrections while having a portfolio that has the liquidity to gain from the presented opportunities and most importantly a will or mental condition to not just spot these prospects but to act on them.

(The author is a co-founder of “Wealocity”, a wealth management firm and could be reached at [email protected])

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