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What you must invest in when the markets go down

By Devangshu Datta
March 13, 2020 09:00 IST
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The best bet for an equity investor appears to be systematic investment plans (SIPs).

Boring as these instruments are, they work well if there is a broad bear market, advises Devangshu Datta.

Illustration: Uttam Ghosh/

Don't stop SIP till you need money!

The Budget was very poorly received by the stock market, which was focussed on hopes of a significant cut in income tax, and the removal of long-term capital gains tax.

The latter didn't happen and it's not clear how much the new "no exemptions" income tax scheme offers in the way of relief to the middle-class.

Another disappointment was the lack of tax breaks for insurance.


Moreover, more non-resident Indians (NRIs) could fall into the tax net with the norms being changed.

The removal of double taxation of Dividends will help corporates.

But the market was also hoping that investors receiving dividends would not be taxed on the income.

Beyond this, the government is clearly cash-strapped and it cannot increase expenditures in critical areas.

The real fiscal deficit, if borrowings of central government controlled institutions and state governments is accounted for, is considerably higher than 3.8 per cent of the gross domestic product or GDP.

Tax collections are way below target. So, the government doesn't have much leeway to increase spending.

The reduction in Budgeted food subsidy also implies less money coming to farmers and demand in the rural and semi-urban hinterland could be affected.

One signal that demand is not likely to improve immediately, comes from the response of automobile manufacturers who have professed disappointment with the Budget.

Startups may get a boost, which could help somewhat with employment generation.

There could perhaps, be a boost to demand in the affordable housing segment, given some incentives there.

But unemployment will remain an issue at least in the short-term, and in the absence of employment generation by sectors such as construction and the auto industry, consumption demand is likely to remain low.

So, it's likely to be business as usual, without the Budget kickstarting a cyclical revival. (It doesn't do much at the structural level either.)

There won't be big upgrades with respect to higher corporate revenues.

However, the corporate tax cuts of mid 2019-20, and the removal of dividend taxation at the corporate end will enable businesses to bank more of whatever profits they make.

Private investment is unlikely to go up until and unless there's an apparent revival in consumption.

Right now, most corporates are running operations with capacity to spare, so there is no particular reason for them to invest in capex.

Asset allocation considerations don't change.

Debt is likely to stay under pressure since inflation is up and the RBI is unlikely to cut rates again in the immediate future.

Gold continues to look like a good hedge.

The metal is already riding high and it could move more.

Coronavirus has already meant downgrades to global growth expectations but overseas assets continue to look like a good hedge against the continuing slowdown in India.

The FPIs have done a lot of selling in the past few sessions.

This could mean more pressure on the rupee, especially if they are less enthusiastic about government debt (Foreign Portfolio Investors have sold over Rs 11,000 crore of rupee debt in January).

A weaker rupee automatically means returns for the overseas investor and of course, this would also mean a boost for pharma and IT stocks.

The response to the Budget might have triggered a sustained phase of bearishness that pulls large caps down to reasonable valuations and lends momentum to the ongoing reaction in midcaps and small caps.

This could last for months since the government has little in the way of ammunition to turn things around in a hurry.

The best bet for an equity investor appears to be systematic investment plans (SIPs).

Boring as these instruments are, they work well if there is a broad bear market.

The investor averages down the acquisition price during the entire phase of bearishness.

In contrast, picking stocks that will do well during a slowdown is always a difficult proposition and carries more risk.

Consider current valuations of 30-50 price-to-earnings (PE) across various segments and compare these to current earnings growth which is running at around 10-12 per cent.

The market could fall a considerable distance and it may correct over a long period as well.

Historically, valuations for large cap indices tend to dip till around the PE 16-18 range during a big bear market.

Systematic Investment via well-diversified mutual funds will pay off in the long run.

Increasing SIP commitments if the market falls by say, 25 per cent, could be a sensible way to increase long-term returns.

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Devangshu Datta
Source: source