By Dr Ravi Singh,
Vice President & Head of Research, Karvy Stock Broking Ltd.
The year 2020 will go as a standout year in living memory for investors. It has been a remarkable journey for the markets which touched the bottom – induced by covid and reached the historical highs. Markets corrected nearly 40% from previous peaks seen in January this year. Nifty has risen like a phoenix from the Nadir of the correction and rallied 79%. Markets have turned euphoric and are hitting fresh record highs every day. So, what is driving the rally?
Central banks globally are repeatedly pledging to keep the liquidity taps open until they gain confidence that the economy can stand on its own and the pandemic has completely subsided. This coupled with near-zero interest rates for a long period has made the global markets awash with liquidity, which is causing the rally.
Other factors causing the rally include sustained recovery in lead economic indicators, better than expected September quarter earnings, falling covid infections count and finally positive news on vaccine progress. Whenever there is liquidity in the financial markets, the excess money chases returns and generally flows into stable emerging markets like India. After pulling out nearly $8.3 Bn from equity markets during March, FIIs have come back with vengeance and pumped nearly $27.55 Bn into equity markets.
Now that valuations of many large caps which were the leaders of the rally are at historic highs, most of the investors must be confused about the right approach to adopt at these high levels. One approach investors can adopt is to focus on cyclical and out of favour sectors which are expected to rise along with the revival in the economy. They should focus on the sectors whose growth is very closely aligned with the growth of the economy. The major benefit of this approach is that these stocks are available at cheap valuations and have not participated in the rally. Hence the risk-return trade-off is in favour of investors. Some sectors which investors might consider include quality infra plays, metals, shipping and logistics, companies focused on outdoor entertainment and sectors that were severely hit due to the social distancing norms like multiplexes, hotels and restaurant chains and amusement parks. It is time for investors to realign the portfolio with a good mix of defensive stocks, gold and also further addition of fixed income to the mix.
Whenever markets are making fresh highs, it is very tempting for novices to get attracted to markets. While it is very tempting for them to make some quick gains, they should be very cautious. Having said that, it cannot be denied that with technological advancements, stock markets have become easily accessible offering investors flexibility, liquidity and transparency in a very extremely regulated environment. While investments in the stock market facilitate to generate wealth, it needs time and energy to evolve from a novice into an expert investor.
Stock markets are volatile by nature. Hence, if you rely on market volatility such as extreme bullish rallies or corrections to take investment decisions, you’ll continually be exposed to the danger of buying/selling at the incorrect time. Since many early investors take decisions driven by emotions like greed and fear, it would be appropriate for beginners to rely on mutual funds and SIPs, which bring in a sense of discipline in investors and experts and qualified professionals manage funds for them.
As they understand the tricks of the game and gain the confidence they should slowly trade directly limiting their trading universe only to well known and well managed solid companies. If played well, stocks have a very important role to play in long term wealth creation. Owning quality stocks from quality sectors will help you to build a savings corpus, shield your cash from inflation and taxes, and maximize the financial gain from your investments. Some of the quality sectors that novice investors can consider include IT, auto, banking, insurance and pharma. Historically, equity investments made with a long term perspective had higher returns than the bank deposits or debt instruments. But to build wealth over the long term, one should understand that equity investment isn’t gambling and an act of making systematic financial decisions supported by data and research.
