It is important not to panic and pull out your invest-ments, especially if they are trading at a low price. Slowdown is a good time to revisit your portfolio and diversify your investments.
There is growing concern in various quarters regarding India’s economic growth. Being an investor, is it necessary for you to change your investment strategy owing to this slow down. Let us address this question in detail.
What is a slow down? As per investment science literature, a slowdown means that the pace of the GDP growth has decreased compared to the past years. It means that production and earnings in the country is not growing at the same pace as compared to the last couple of years. An economic downturn is normal after six or seven years of fast-paced growth. For instance, the Chinese economy, which saw impressive GDP growth a few years ago, is in slowdown pace now, the slowest in seven years.
When you are faced with a slowing economy, you may be wondering what your investing strategy should be. Often, it is tempting to pull your money out of the stock market completely or you may want to stop putting money in the stock market. It is important to be in the market to make money; therefore, one should continue to invest, and not be worried by a temporary slow pace of growth of the economy.
Time to diversify
Slowdown is a good time to revisit your portfolio and diversify your investments. You do not want to have all of your shares in multiple companies of one industry. For example, you do not want your portfolio to only represent the tech or auto sector, because if that industry takes a hit, so will you. An easy way to diversify your portfolio is to purchase stocks of varied industries so that you can spread the risk over different companies. In fact, it is actually a good time to buy stocks of certain firms as they are likely to be at lower price. It is also a good strategy to take advantage of the lower prices if you can afford to invest.
Is the auto segment really bad now? One can see auto numbers quoted everywhere. This segment is affected owing to various reasons. For instance, NBFCs are going slow on their auto loans due to the liquidity crisis and automakers are also getting ready for the new BS-VI norms and investing more in electric vehicles.
Passenger car sales is slowing down but commercial vehicle sales grew by 17 per cent in FY19. Again, people claim that real estate and construction segment is in a slow down phase. But, check cement production. It is up 13.3% in FY19, double the growth compared to previous financial year. So, one should not get carried away by looking at one segment. There are always pockets of growth even in a slowdown.
Shift in consumption patterns
There is a significant shift in consumption patterns in the country. Millennials are not interested in owning and maintaining cars; rather, they prefer to use the services of taxi aggregators. They are more interested in experiences such as holidaying and other outdoor activities.
To conclude, when there is a slowdown, it is important not to panic and pull out your investments, especially if they are trading at a low price. This strategy can cause you to lose your money. Your best bet is to let your money stay where it is, and wait for prices to pick up as this slowdown is temporary in nature.
The writer is a professor of finance & accounting, IIM Tiruchirappalli