The pain is more severe for the broader markets where the midcap index is down over 13 per cent, while the smallcap index is down 17 per cent. Both the indices have fallen nearly 20 per cent from their 52-week highs, indicating that they are on the verge of being bearish.
For context, the NASDAQ is already in bear market territory after falling more than 20 percent over the past six months, which is scaring investors, especially amid fears of a recession.
Investors who are wondering whether the market has bottomed need to keep in mind that such predictions are difficult to make. Having said that, there is a possibility that the market will fall further before it turns better.
Indian stock markets are still expensive on an overall basis, even though India is witnessing higher growth than other emerging markets. Countries around the world are now targeting inflation by raising interest rates to counter inflationary pressures.
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Take America for example.
Until about six months ago, the world was debating whether inflation in the US was “temporary” or “structural.” Then we saw what no one could have imagined – the Russo-Ukraine war, which has pushed energy prices to another. This was against the backdrop of a very sharp rise in the metal prices globally in a year.
It is now clear that the demon of inflation is here to trouble the world for good, which will prompt central banks globally to raise interest rates. The US Federal Reserve is expected to do the same, and the dollar is now at a 20-year high as more money pours into the greenback in anticipation of it.
Brazil and Australia have both raised interest rates, and the Norwegian central bank has said it intends to raise rates next month.
So as markets falter from rising interest rates, should investors sell now and buy again later?
no at all! This would be a very bad decision for your personal investment. The decision to sell now and buy later stems from the confusion that many investors have of being able to time the market correctly.
In all the major crashes we’ve seen in the past, many investors took this call to sell the fall and buy again when the market bottomed out, only to later regret not having time to enter.
After a sharp jump, the stock markets are sure to fall. Markets spend more on both sides. Till about a year ago, everyone was having a great time in the stock markets and everything investors touched turned into gold.
This brought in more investors and the market went up. This turned out to be a virtuous cycle that added to the market rally. This process needed only a trigger point for self-improvement. The market has rallied itself in last year’s rally and this correction is taking away that foam.
So where should investors invest their money?
Long term investors should stay the course and follow an asset allocation approach to invest in multiple assets like Equity, Debt, Gold, REITs etc. In fact, the current correction is good news for genuine long-term investors.
The biggest hurdle in investing in good companies is that they are never available at fair valuations under normal market conditions.
Geopolitical or macroeconomic factors that lead to index-based sell-offs across the country make your portfolio returns unattractive. That’s when weak investors are out of the game.
As a long term investor, I look for opportunities like this to better add incremental cash/debt to businesses in the next six months to a year without worrying about the indices.
Remember, good businesses offer a fixed value to their customers, while their incremental cash increases more than the risk-free rate of return (consider it FD rate for simplicity) consistently, year after year.
When the risk-free rate of return increases (as now), they need to work harder to maintain their growth rate. Large, organized, professionally operated businesses can navigate such times better than small, unorganized businesses.
(Vishal Vij is the Founder and Managing Partner of Nesteg Wealth. Views expressed are personal.)