The market is bleeding red. Many stocks have fallen down from high and are trading below their respective 200-DMA. The Nifty50 index comprising stocks of the 50 best companies operating in the market has fallen by 9.1 per cent to date this year. Extrapolating the bear effect on the Nifty500 index, we see a steep fall of 10.53 per cent, thus, indicating how the mid-cap and small-cap stocks suffered a major hit in recent times. Those who have parked in thematic funds, especially in the technology and realty sector, have suffered immense losses with the Nifty IT and Nifty Realty indices having gone down by 27.87 per cent and 19.89 per cent, respectively.
The movement of the stocks is clearly reflected in the mutual fund portfolios with some of them having fallen more than 25 per cent from their peaks. Most investors who had been busy tracing technical charts and had anticipated the fall are continuing with their systematic investment plans while also waiting for the right time to deploy their cash in these funds through lump sum investments.
The markets are indeed attractive from the perspective of long-term investors. However, have the markets fallen enough. Data suggest that some stocks are still trading at prices far above their valuation levels. There is not much ambiguity regarding the valuations of many stocks.
Vivek Bajaj, Co-founder, StockEdge & Elearnmarkets says, “The Indian equity markets are still facing challenges from global cues. There is no question about it, but the truth is that India’s economy is still growing especially given that the rest of the world appears to be in a real slowdown. Markets will continue to rise and fall; there will be volatility but the bottom line at we are essentially growing and adding value year after year, which is the good thing that can happen to an investor.”
Are we trading at attractive valuations?
Many mutual fund houses are anticipating a rise in the stock market considering how roughly 50 per cent of the stocks are trading at prices much lower than their valuation levels. The fund managers maintain that the stock market usually takes an upsweep post such a downtrend.
Yash Gupta, Equity Research Analyst, Angel One Limited says, “We have seen a healthy correction in the market on the back of global as well as domestic concerns, one of the major concerns is the Inflation and rate hike in the USA as well as in India. It seems like India is a better place in terms of inflation and GDP growth for FY2023. We believe that the market has priced in all the negatives at this point in time. Currently, the Nifty is trading at a price to earnings of 19.50x, which is at the lower side of the last five-year historical range and the dividend yield is also attractive at 1.4 per cent. We have seen more correction in midcaps and small caps compared to Nifty 50. Nifty midcap 100 is trading at a price to earnings of 21x which is also at the lower side of the last five-year historical range. We suggest investors to invest in the market on a proportional basis and invest for a long-term horizon as it may happen that the market may consolidate for the time being.”
Many investors look at the 30-day moving average to determine if stocks are attractive. Still, others rely on some detailed approaches or more sophisticated tools to check if there is more time left for the markets to topple down from their current value. Gaurav Rastogi, CEO, Kuvera.in says, “30 DMA will be a very noisy signal, it will flip very often and will lead to overtrading. Cyclically Adjusted PE is a good option to check for stocks at cheap valuations. Among technicals, longer-term moving averages like a 200 DMA are better to use, however no single technical works across stocks.”
May traders rely on price action, which is at the heart of trading. They look for support and resistance in different time frames to execute the trades. While they use the scanner to look at the fundamentals of the companies they are planning to invest in, they use technical analysis charts to check the prices of stocks at which they must enter and exit the market.
Are we out of the woods yet?
Indian stocks have tumbled more owing to macro factors than any other. True that some stocks were trading at too high valuations which led to the bubble burst similar to the dot-com bubble burst in March 2000. Stock markets had overshot to the downside just as they had rushed to the upside.
The Russia-Ukraine skirmish is still far from over, the US Federal Reserve has announced a steep increase in the interest rates within a short period coupled with the global inflation prompted India’s Central Bank to take note. The persistent inflation prompted the Reserve Bank of India to hike interest rates first – a conventional method used to suck the liquidity out of the markets. The effect of all factors is now evident on Indian stocks.
Should we stick to equities?
Those who had been investing in equity mutual funds for a prolonged period are now finding it difficult to contain their trust in equities and equity-related instruments. The reason is awry returns that fell from double-digit to single-digit numbers and negative returns in the past year.
There is no perfect bottom, which means that waiting for stocks to fall more so that you can buy them when they touch rock bottom is nothing short amounts to unwarranted whims and fancies. Most people are trying to track the movement of midcap and small-cap stocks hoping to invest in them at every dip and gain maximum later. Stock market analysts describe this behaviour as trying to catch a falling knife.
Investing in mutual funds thus becomes a feasible option wherein the fund manager invests the money across various schemes, sectors and themes. As money gets distributed in various asset classes with varying capitalizations, investors benefit from portfolio diversification.
Suresh Sadagopan, founder, Ladder7 Financial Advisories says, “Stock specific recommendations need a serious investigation into stock, sector fundamentals. We suggest diversified equity funds which are neither stock nor sector-specific and have the potential to weather any turbulent situation better than concentrated stock or sectoral investments.”
Riding the wave of optimism
Investors new to the market feel pessimistic with the market drooping down by a few points every day. The veteran investors who have earned wealth from the market are rejoicing at the prospect of being able to park their surplus money in their choice of stocks. Those who had refrained from investing to date citing high stock valuations are ecstatic about this opportunity of being able to get their hands on good shares that would earn them loads of money in the long run. While the foreign institutional investors are continually dumping their investments in Indian stocks, the optimism and hope of domestic investors have managed to lend much-needed support to the market.
The bear market will undoubtedly give way to the bull run in the market. Hopes of wealth creation, in the long run, have engaged many new people too to put their money into the market. However, the extended impact of macroeconomic factors has left many investors tired and panicking. Deciding when the market looks most attractive is a difficult tale to tell for retail investors. The best way is to stick to continued and regular investments in your mutual fund investments. Investing through systematic investment plans (SIPs) is by far the best option to park money in equities.
