Investors should now be looking at trimming their portfolio and making prudent investment decisions
With the S&P BSE Sensex benchmark index falling over 20 per cent from its highs of January 2015, investors are wondering whether it is time to exit the market.
As a retail investor with investments in the equity market, you should be prepared for some lows along the way. After all, each market has its own dynamics and cycles, but a fundamentally strong stock will offer you good returns in the long run.
With a constant correction in the Indian equity markets in the past few weeks, even the most optimistic investors are having doubts about the long-term impact such a downward trend may have.
So are we looking at a long term bear market as the global economy's sluggishness along with low growth rate projection in India add up, or are the current lows closer to the market bottoming up?
Let us understand by taking a step back into 2015.
Reasons for stock market nosedive in 2015
From the high of 30,025 in March 2015, the Sensex hit a 52-week low of 23,840 on January 20, 2016. The fall of nearly 20.6 per cent has made investors and analysts skeptical. While it is not the first time the markets are witnessing a bear cycle of sorts, here are some of the reasons why the sluggishness has played out in the past year.
- Falling rupee versus the dollar: The strengthening of the US Dollar as compared to the Indian rupee has been one of the reasons which led to a decline in the market strength. A weak rupee may be good for exports, but generally bad for the local economy. While experts feel the Rupee has now more or less bottomed out, which means it may not drop further, the damage to the economy may take a while to get a positive impetus.
- Global economic sluggishness: The sluggishness in the global economy, including the world markets of the US, EU, and China has been paramount for the current sluggish market sentiment. The crash in global crude oil prices reflects the decreasing demand for oil and slow growth parameters for industrial growth overall. The slowing down of the world economic engine has had its reflections on the Indian market along with slow domestic growth leading to the current bear phase.
- Subsequent withdrawals by FIIs: The falling rupee meant that most foreign institutional investors (FIIs) were looking to sell their holdings in the market or face the risk of falling rupee hurting their gains. Media reports suggest that global investors have withdrawn over $700 billion from all emerging markets in 2015 including India.
Understanding “market bottoming out” syndrome
When markets reach a point which analysts feel is the lowest and the only trend emerging henceforth can be an upward cycle, markets are said to have bottomed out.
There are many fundamental and technical aspects that analysts take into account when calculating the bottoming out of markets or stocks. Analysts are divided over the bottoming out numbers for BSE sensex as some feel a drop to 22,000 levels may be the bottom while other schools of thought consider a further drop close to 17,500 levels before things can move in a positive spiral.
Current lows good buying opportunity
The current lows however are an opportunity to buy stocks at their low valuations, something that can be beneficial in the long run. But pick the stocks after due deliberation and proper evaluation. A good Budget session followed by good monsoon season in the coming months may just be the impetus that can usher in an era of positive growth in the market.
Some tips for you as an equity investor in the current phase
Choose your stocks wisely: Choosing your stock picks wisely is a sutra for all times, but is more prominent in today’s market. The government is likely to offer some incentive for various sectors to kick start a growth cycle. Maintain a portfolio of quality stocks that are likely to receive such a boost. This may not be such a bad time to exit some of the non-performing stocks or funds you may have invested in.
Consider moving to large caps: Recently, mid-cap stocks outperformed their more illustrious large-cap peers. With market under pressure and a global decline, large caps are likely to offer better consolidated returns over a long term. You can keep this in mind when picking your mutual fund investments as well and invest in funds with a large cap investment portfolio.
Opt for dynamic allocation: With economic parameters changing quickly, you should be able to handle your investments in a dynamic manner. If you do not have time to closely monitor your investment, invest in schemes that offer a dynamic asset allocation.
Continue investing: If you are using a SIP route, then this bear phase should not be a deterrent for your long term plans. With Indian fundamentals being strong, the long term horizon for growth in the Indian markets is quite positive. Keep investing, but also keep yourself informed to make the best use of such bear cycles.
With the markets entering a bear phase, investors should now be looking at trimming their portfolio and making prudent investment decisions.
Illustration: Uttam Ghosh/Rediff.com
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