An important lesson from stock market history is that it is impossible to time the markets. Market highs and lows will be known only in hindsight. Investment decisions must be made on foresight. So, what should investors do now?
Another important takeaway from market history is that markets overreact, both on the upside and downside. So, in a bull market stock prices will be driven much higher than their fundamentals can justify. Conversely, in a bear market stock prices will be driven lower than their fundamental worth. Successful investment involves exploiting this discrepancy between stock prices and their fundamental worth. This is a challenging task, but not difficult.
More importantly, to be a successful investor, you don’t have to sell at the peak and buy at the bottom. Financial history tells us that wealth is created by remaining invested. Selling can be done for the realization of financial goals. More important is buying. Buying need not be, and often cannot be, at the bottom. It is sufficient to buy somewhere near the bottom when valuations have turned attractive.
So, is the market now somewhere near the bottom?
Are valuations attractive?
Globally markets have corrected. NASDAQ corrected 35 percent from the peak and S &P 500 corrected more than 20 percent from the peak. Nifty corrected by 18 percent. Will the markets correct more? May be. But investors don’t have to wait for more correction. This is the time to buy. The right policy should be to buy more when the markets correct more.
An important factor that fueled the bull rally following the March 2020 crash was the humongous liquidity (Quantitative Easing) and cheap money created by the leading central banks, particularly the Fed. QE is over, and QT (Quantitative Tightening) has started. This is a negative for markets. But the important point is that markets have largely discounted this and have corrected, even though we don’t know whether there is more correction in store. In the worst-case scenario, Nifty may correct by another 5 percent to around 14500 levels. So, it makes sense to start buying now and buy aggressively if the markets correct to 14500 levels.
It is not difficult to identify the sectors to invest. Relentless FII selling have depressed the prices of financials even when their fundamentals are improving. So, financials should be the top pick. But returns from financials might take time. They will stage a smart recovery only when FIIs stop selling. So, investors will have to wait with patience. But handsome rewards are certain.
Other sectors that look promising are IT, telecom, select autos, pharmaceuticals and other export segments. In fact, bluechips across sectors can be bought for the long-term. FMCG will be a good hedge in these difficult times. The FY23 Q1 results of cement, consumer durables and metals are likely to disappoint.
A safe and foolproof strategy now would be to top up equity/hybrid SIPs. Investors in high-tax brackets may also seriously consider investing in debt funds since the post-tax returns after inflation indexation can be much higher than post-tax returns from bank FDs in this time of high inflation.