Why should investors remain invested?

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A consistent feature of the stock market is its ability to surprise. Market moods and trends will suddenly change catching even the best of experts on the wrong foot. Markets can overreact both on the upside and downside. Market highs and lows will be known only in hindsight. These are important lessons that investors should learn.

From the June low of 15183, Nifty has pulled back by around 11 percent (as on 21st July). The 1-month Nifty return (as on 21st July) is above 8 percent. It is important to note that this pullback is broad-based. Nifty Mid-cap and Nifty Small-cap 1- month returns are 12.73 percent and 12.16 percent respectively. Normally, a bear market pullback happens mainly in index-heavy large-caps. But this rally now is more widespread and, therefore, has to be closely watched.

It is important to appreciate the fact that the Indian economy is resilient amidst the global headwinds. GDP growth projection (World Bank) for 2022 is 7.5 percent for India while it is 4.4 percent for China. For EMs like South Africa and Brazil, the growth projections for 2022 are 2.1 percent and 1.5 percent respectively. It is clear where growth and corporate earnings are likely to come from. High frequency indicators like electricity generation, two-wheeler and passenger vehicles sales and bank credit growth indicate a resilient economy. CPI inflation in India, though higher than RBI’s upper band, is much lower than the inflation rates in the developed world. The rising corporate profit to GDP ratio (up from 2.2 percent in FY 2020 to 4.3 percent in FY22) augurs well for the stock market.

In our last editorial (June 2022) titled ‘Time to Buy” we pointed out a major discrepancy in the market: Prices of financials, particularly leading banks, were going down while their fundamentals were improving. Rising credit demand and improving asset quality of financials, in the context of a resilient financial sector in the pink of health, was a clear trend. But the market moved against this clear fundamental trend due to sustained FII offloading and the short-selling that it facilitated. Those investors who exploited this discrepancy have already been rewarded with a sharp turnaround in financials in one month.

Up moves in the market can be sharp and swift. If investors miss out on a 10-day or 20-day up move in the market, the entire gain in one year may be missed. That is why it is important to refrain from timing the market; but remain invested and to continue investing systematically.

Apart from the leading names in the major sectors of the economy, there are many companies in certain niche segments which are doing well. Some of these companies have near monopoly status and high pricing power. It is not easy for retail investors to do research in these areas and identify stocks. Moreover, the risk is very high. So, it is desirable to invest in this segment through mutual funds, ideally through the SIP route.

The uncertainty in the global economy and markets will continue to remain high for some more time. There are some dark clouds on the horizon; but there are silver linings too, particularly for India. Investors should remain invested and wait for the clouds to clear.

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