scorecardresearchThings to keep in mind before investing in equity amid worries over global recession

Things to keep in mind before investing in equity amid worries over global recession

Updated: 22 Aug 2022, 11:17 AM IST
TL;DR.
It is important to weigh one’s risk appetite and short-term liquidity requirements before allocating further capital toward equity investing. Here are a few things to keep in mind before taking the plunge into equities include
Managing your equity portfolio in the current backdrop of a potential global recession

Managing your equity portfolio in the current backdrop of a potential global recession

As investors grapple with volatility and reduced portfolio valuations, they should consider adopting a multi-pronged approach to equity investing.

Over the last two years, the benchmark Nifty 50 index has delivered stellar growth and hit new highs. However, its ascent was halted at the beginning of 2022 as the war in Ukraine, rising inflation, and looming interest rate hikes put a spanner in the works and acted as headwinds to economic growth.

Having said that, it is important to highlight that the Indian growth story remains intact as a host of factors including a thrust on manufacturing, a fertile startup ecosystem, and a clear demographic advantage have now aligned to give economic growth the required impetus.

While the longer-term outlook remains positive, in the near term, the economy and the markets could continue to witness weakness. In the backdrop of such a landscape, investors must position their portfolios such that they can optimally leverage the long-term growth potential of Indian equities while protecting portfolio downside in the near term.

Historically, it has been observed that on an average, economic downturns do not last as long as expansions. Thus, investors should proactively assess their asset allocation strategies and identify equity investment opportunities that are available at compelling valuations.

However, it is important to weigh one’s risk appetite and short-term liquidity requirements before allocating further capital towards equity investing. A few things to keep in mind before taking the plunge into equities include:

In such a volatile environment, caution must be exercised when investing in highly leveraged stocks even if they offer the promise of better growth prospects. This is because such companies are at a higher risk of defaulting on interest payments, triggering bankruptcy proceedings that are detrimental to investor interests. In case of existing equity holdings in such companies, it is recommended to either book losses or put a strict stop loss in place to avoid further capital erosion.

From the perspective of fresh equity allocation, it might be better to invest in a mix of growth stocks and value stocks to diversify one’s portfolio and tide over volatile periods without losing out on the potential to generate future profits. Growth stocks generally provide market-beating returns during bull phases but underperform value stocks when going into a recession due to higher sensitivity to economic downturns.

Value stocks are companies that have strong fundamentals but are currently available at a price that is significantly below their intrinsic value. Investors can include them in their portfolio today with the expectation that their prices will converge with their true fundamental value over a medium to long term period.

Another option that investors could explore is to invest in Index Funds or ETFs. These are passively managed funds that aim to mimic the composition as well as the performance of the underlying benchmark index. Since these funds are not actively managed, the risks associated with stock selection are removed. For investors who are vary of equity market volatility, such funds can be a great opportunity to benefit from the long-term return potential of equities while mitigating some of the risk.

In case of direct equity investing, investors would do well to look out for quality stocks that are trading at below-par valuations, and which are generally more resilient to recessionary pressures. Companies facing short-term pressures on margins, volumes, revenues or profits should be avoided unless there are fundamentally positive changes that could drive them towards better financial performance.

Further, investors looking to enter the market with a long-term horizon would do well to capitalise on opportunities to invest in blue-chip companies that are available at attractive valuations today.

Recognising the fact that holding onto excess cash can be detrimental to generating inflation-beating returns, it makes sense to follow these basic steps to protect one’s invested capital and potentially profit from a recovery with a better diversified portfolio. That said, it is recommended that investors must consult their financial advisors and plan their equity investments carefully rather than rushing to buy or sell equity in the current volatile market phase.

Mr. Raghvendra Nath, Managing Director of Ladderup Wealth Management
 

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First Published: 22 Aug 2022, 11:17 AM IST