VOLATILITY & VALUATIONS
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!