By Raveendra Balivada
“The stock market is a device to transfer money from the impatient to the patient.” – Warren Buffett.
Now that the humankind is locked down, the animals are coming out gradually and claiming their territory. In the wake of the impact of COVID2019 pandemic, the equity markets have gone beyond ‘Bull Phase’ and ‘Bear Phase’. These challenging times have introduced us to what we now call ‘The Kangaroo Phase’ – of extreme volatility. This, however, offers the patient investors an opportunity to enter the markets and stay put with an aim to build wealth. It is a phase when there is no clear direction to the markets and most technical as well as fundamental analysis have come to a standstill as dominant corporates withdraw their FY21 guidance and choose to wait and watch for a couple of months.
How should a retail investor maneuver their equity investments in the current market? Well the idea is simple – catch the big fish when it is close to the shore. Since the beginning of the COVID2019 pandemic in November 2019, the markets have remained very volatile and have gradually lost more than gained. During the period November 2019-June 2020 (18th), the largest MoM decline in the CNX Nifty 50 Index was in Mar’20 shelving the index value by 23.2% after which it witnessed the highest gain during the period in Apr’20 at +14.7% MoM. Effectively though, the markets have given away 17.1% in YTD’20 with individual portfolio losses ranging wide to as high as ~50% eroding the wealth built over years.
If there is a best time to invest in equities, it is during periods of bearish sentiment. We have witnessed several market downturns in the past and data suggests that equities have most often bounced back from the lows and there was no looking back for at least 2-3 years. In three years after hitting lows, equity markets (here Sensex) have given robust returns of +116% post correction of 55% during Tech Bubble Burst in 2000-01, +298% post 14% correction during SARS in 2002-03 and +214% post correction of 24% in the time of Bird Flu 2004-05. Similarly, the impact of COVID2019 has resulted in a correction of ~38% in Mar’20 and since then markets have turned positive.
Usually, in a weak market, there are about two or three occasions when one thinks that the markets have turned around but it is short lived and we witness some correction again. These relief rallies are nothing but an attempt to jumpstart the markets’ dampened battery. In such times Foreign Portfolio/Institutional Investors (FPIs/FIIs) and Domestic Institutional Investors (DIIs) start entering the markets gradually. In Apr-Jun’20 so far, while domestic MFs saw a decline of ~Rs42.2 bn the FPIs/FIIs pumped in funds to the tune of +Rs276 bn resulting in overall market gain of +17% (CNX Nifty50). This ‘shifting of hands’ may continue for some more time until further green shoots are visible.
For a retail investor, this could be a good time to invest in equities as stocks of several well managed companies with strong balance sheets, sustainable cash flows and a quantifiable future outlook, become available at relatively lower valuations as compared to the more stable times. Whether one decides to enter the markets via Direct Equities or Mutual Funds (lumpsum or SIP) is one’s own discretion. But with some advice and efficient execution, it may prove to be the most opportune time to secure investments in this asset class.
(Raveendra Balivada is Head Investment Advisers at HDFC Securities. The views expressed are the author’s own.)
