How to take advantage of volatile markets? We explain

The equity market are treacherous shoals at the best of times, and the current external factors both domestic as well as global do not make navigating these treacherous waters any easier.

But experts feel that this very uncertainty and volatility will present an opportunity for investors to earn as long as they maintain their cool.

“Though there are a host of issues dragging down equity markets both globally and in India, we believe that most of the challenges are known and not unknown to the markets,” says Gaurav Dua, Senior VP and Head of Capital Market Strategy, Sharekhan by BNP Paribas. Generally, the known issues get factored in quickly.

“Indian equity markets had a limited impact as the growth expectations remain robust for India. This is in contrast to the situation globally,” says Ruchit Jain, Lead Research , 5paisa.com, who believes that most of the negatives have been factored into current market prices as the broader markets have seen a decent correction.

In the last few months, India VIX (volatility index) has managed to trade within the range of 12-18 and in spite of several global shocks Indian equity markets have managed to absorb these news standing tall. Except for any black swan event (something unexpected like a war), market watchers do not expect any major risk or significant volatility in our markets in the short to medium term.

READ MORE: Diversification in investing: Here's how to reduce risks during volatile markets

So how more specifically will Indian equity markets look like for the rest of the Financial Year, i.e. till end March 2024?

Experts share that the key is to ride out the storm.

“Markets tend to be volatile for most of time rather than trending in one direction,” says Dua.

It may be noted that despite all the volatility and the major events like demonetisation, GST implementation, ILFS debacle, the pandemic with its consequent lockdown, record inflation and aggressive rate hikes, the markets have ended each of the last seven calendar years (from 2016 to 2022) with positive returns.

So investors who have stayed invested and systematically added money into equities have earned returns of 13-14% CAGR (compounded annual growth rate) in the last seven years which is more than double the interest rate on bank term deposits in the same period. “Volatility is actually the friend of an investor,” says Dua.

“We believe that investors should embrace volatility as a friend rather than shying away from it,” says Sunil Damania, Chief Investment Officer, MarketsMojo, noting that equity and volatility are inherently intertwined.

The market may appear volatile in the short term, but its fluctuations become less pronounced when the timeframe is expanded.

“To effectively manage volatility, investors should adopt three key traits: First, maintain discipline while investing; second, exercise patience; and third, avoid succumbing to herd mentality,” Damania says.

But within this volatile band lies the proverbial Pot of Gold (and we apologise for mixing our metaphors here).

“Go with the market thumb rule, that is to buy on DIPS,” says Kishor Ostwal CMD CNI Research.

Ostwal shares some very interesting market contours.

FPI or Foreign Portfolio Investment is concentrated in a few sectors like Oil and Gas, Banks and IT. Ostwal notes that there was substantial selling in these sectors that affected sentiments.

Ostwal thus advises retail investors to buy sectors where FPI are less, for example metals and auto less than 4% each makes for a safe bet as is real estate less than 1.5%, railways less than 1%.

Ostwal also suggests value stocks instead of growth stocks. He cites a major IT stock that is prone to 40% correction on even small negative news whereas value stocks are bottom up stories where pain of seeing a considerable downside is lesser.

This is very well, but how does the small investor deal with the uncertainty on the bourses? Experts advise that it is a combination of knowing the markets and yourself.

“Investing in a systematic and staggered manner is the best way to deal with market volatility; hence one of the reasons for the growing popularity of SIPs” says Dua. The same can be followed in investing directly into equity markets.

Next, it is always better to avoid chasing momentum and speculative stocks especially in volatile market conditions.

Finally, do not invest with borrowed funds and keep some cash available for any eventuality or near term requirements.

During volatile times, proper money management skills help to ride the difficult times. “One should not be over-exposed to a particular sector or theme and also have a timely exit strategy not only in profits but also when in loss,” says Jain.

READ MORE: Worried about market volatility 2023? Here are 4 investment strategies you must know

Experts are unanimous that there is a tremendous scope for investors in the next year.

“I see the Nifty at 20000 before Dec 2024 for two reasons,” says Ostwal.

First we are trading at a 1 year forward PE of 17 as against 5 years average of 26.5 and 32 years average of 25. In 32 years we had seen inflation as well as high rates yet we were traded at 25 PE. This equation will be the order of the day sooner than later.

At 25 PE Nifty fair value is 30000 hence I see at least 20000 which is still at massive discount.

Second criteria of valuation is market cap to GDP. Current market cap to GDP is .90 as against 10 years average of .88. The peak ratio was 1.49 in 2007. Recent high was 1.19 hence I see potential upside in the market instead of feeling bearish on global factors.

“Considering the current valuations and India's notable resilience to global events, it is expected that Indian stock indices will yield positive returns in 2023. These returns are projected to be in the low teens, with the Sensex anticipated to reach 68,000 and the Nifty forecasted to attain 20,100 by the end of the year,” says Damania.

“Investors should look for stock specific buying opportunities in FY23,” advises Jain. Sectors such as Banking, Capital Goods and Infrastructure stocks are likely to outperform in this year and hence, one can look for buying quality stocks from these sectors.

The various sectors and volatility: Given the strong conviction in India’s multi-year strong growth outlook, Dua sees scope for healthy gains in banks, industrials, real estate and select consumer companies. Also value is seen in some of the public sector companies in banks, energy (especially Oil Marketing Companies) and specific sectors like defence, power etc.

Conversely, given the tough macro environment globally, Dua notes that export-oriented companies remain under pressure. Thus, it would be better to be cautious on IT services, pharma, textiles and other exporting companies in the near to medium term.

Manik Kumar Malakar is a personal finance writer.