VOLATIL­ITY & VAL­U­A­TIONS

Money Times - - Volatility & Valuations - By Laxmikant Bhole

Mid-caps have fallen sharply since Fi­nance Min­is­ter Arun Jait­ley an­nounced the bud­get on 29 Jan­uary 2018. The Nifty traded at the 11130 level that day where-af­ter it rose to a high of 11760 in Au­gust 2018 be­fore it slipped to 10150 two weeks back but bounced back slightly to close at 10303 last week. The Nifty Mid-Cap in­dex, which traded at 21272 on 29 Jan­uary 2018, fell to 15802 two weeks back be­fore it bounced back to close at 16515 last week. While the Nifty has lost around 650 points in the last 8 months, the Nifty Mid-Cap in­dex has lost nearly 4,450 points! In be­tween, the Nifty ad­vanced to­wards 11760 in Au­gust 2018 even though the mid-caps were bleed­ing. There­after, it re­sumed its down­trend again hav­ing lost more than 1,600 points till now. I had warned in­vestors about this cor­rec­tion in my pre­vi­ous ar­ti­cles. The last 8 months have been very painful for in­vestors, par­tic­u­larly re­tail in­vestors who have huge mid-cap hold­ings in their port­fo­lio. The last one month was equally painful for large-cap in­vestors as qual­ity stocks like Hin­dus­tan Unilever, Ba­jaj Fi­nance, Larsen & Toubro, Tata Con­sul­tancy Ser­vices, Ba­jaj Auto, In­fosys, Yes Bank, State Bank of In­dia, etc. cor­rected sharply by 10-50%. Var­i­ous events in this pe­riod may have trig­gered this cor­rec­tion. On the global front, it was the trade war be­tween the USA and China, higher crude oil prices, Fed­eral Re­serve stance, geo-po­lit­i­cal ten­sion be­tween North Korea and USA, ris­ing bond yields in USA, strength­en­ing dol­lar, etc. while on the do­mes­tic front, it was the in­tro­duc­tion of LTCG (long-term cap­i­tal gain tax), ris­ing CAD (cur­rent ac­count deficit) due to higher oil prices, weak­en­ing Ru­pee, in­tro­duc­tion of In­sol­vency and Bank­ruptcy Code (IBC), in­tro­duc­tion of stressed as­set frame­work by the RBI, etc.

At such times, in­vestors for­get the ba­sic guid­ing prin­ci­ple of the stock mar­kets viz: the mar­kets are bound to cor­rect when the val­u­a­tions are stretched and not jus­ti­fied. The In­dian mar­kets, too, were over­val­ued and had to level out be­fore mov­ing ahead. On 29 Jan­uary 2018, the Nifty traded at a P/E of 27.71x and P/BV of 3.76x, which was alarm­ing. On the same day, the Nifty Mid-Cap in­dex traded at a P/E of 50.83x with P/BV of 2.99x. When the Nifty ad­vanced to 11760 in Au­gust 2018, it traded at a P/E of 28.66x with P/BV of 3.82x while the Nifty Mid-Cap in­dex traded at a P/E of 59.43x with P/BV of 3.29x. Af­ter the mar­kets have cor­rected sharply, the Nifty traded at a P/E of 24.83x with P/BV of 3.27x last Fri­day, 19 Oc­to­ber 2018. Al­though the Nifty and the MidCap in­dices have cooled off a bit, I am still not com­fort­able on the val­u­a­tion front and feel that there is still some room for the mar­kets to cor­rect fur­ther. How­ever, I am bullish about the mar­kets for the long-term as I be­lieve that the struc­tural changes ini­ti­ated by the NDA gov­ern­ment are pos­i­tive for the In­dian econ­omy but the fruits are yet to be reaped. The Q2 earn­ings sea­son, too, will in­flu­ence the mar­ket trend. How­ever, in­vestors are ad­vised to re­main cau­tious about any mar­ket pull-back. What have we learnt from the mar­ket volatil­ity and deep cor­rec­tion over the last 8 months? Let’s see how we can deal with such mar­ket sce­nar­ios in fu­ture:

1. Cor­rec­tions are a part and par­cel of the mar­kets. If you’re an in­vestor, do not fear cor­rec­tions. Act smartly and use the op­por­tu­nity to av­er­age or ac­cu­mu­late. When oth­ers are fear­ful, be greedy and when oth­ers are greedy, be fear­ful.

2. Never in­vest all your funds at one go. In­stead, in­vest some amount every month. In­vest­ing reg­u­larly helps re­duce the im­pact of volatil­ity on the av­er­age buy price.

3. Hold­ing fun­da­men­tally good stocks in the long-term will al­ways re­ward you. Long-term in­vestors can peace­fully sleep even dur­ing cor­rec­tions as the low lev­els of­fer a great op­por­tu­nity to ac­cu­mu­late and lower the av­er­age buy price.

4. Re­view your port­fo­lio pe­ri­od­i­cally and shuf­fle it reg­u­larly. This does not mean in­vestors should track their stocks daily and sell a stock if it goes down. Sell only when a par­tic­u­lar stock loses qual­ity.

5. Av­er­ag­ing a stock in a down­trend may not al­ways help as the stock could fall fur­ther be­low your buy price. But if you have con­vic­tion about the stock, don’t be afraid to ac­cu­mu­late it on dips. Study its fun­da­men­tals and take a call ac­cord­ingly.

6. Since the mar­ket is down 10% from its high, it doesn’t mean we’re in a bear­ish phase. The trend may be bear­ish but the long-term prospects re­main in­tact.

7. In­vest reg­u­larly. Don’t stop in­vest­ing if the mar­kets are in a cor­rec­tion phase.

8. Book prof­its and take your cap­i­tal out al­ways. This will help you roll your money and cre­ate wealth. Happy in­vest­ing!

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