At nearly 39,000 levels, the benchmark S&P BSE Sensex is once again within kissing distance of its all-time high. The temptation to believe that the rally is here to stay is indeed very high. Whether that is the case or not is hard to predict. It’s especially hard to say when a correction will happen, even if past price data shows it’s due.
Investing in such times can be confusing, especially since economic data is unsupportive of the market rally. At the same time, the fear of missing out on the rally can mean that you take on more risk by lapping up expensive stocks at high valuations in the current rally. What should you do? Begin by avoiding these four reactions at the moment.
Lump sum investing: When uncertainty is this high, stock price changes on a daily basis become sharper and more volatile. While one can’t say when a correction may happen or how long it would last, the expectation given the macroeconomic data indicators and declining earnings growth remains one of an impending correction. At the same time, liquidity support is keeping market levels in place, not allowing the benchmark index to fall too much. In such times, when the near-term graph can go in either direction, it’s best not to jump into the equity markets with a lump-sum.
You could space out your investments with the help of systematic investment plans in stocks and mutual funds, or you can consciously break your lump-sum investment into smaller portions, to be invested over time. According to Anup Bansal, managing director, Mitraz Financial Services, “For new investors, we try to have an overall strategic asset allocation and investments in equity are done a little at a time in a staggered manner. For existing investors, we have advocated a slightly lower allocation to equity, while any systematic investments will be continued, we are going slow on incremental allocations.”
Avoid looking for turnaround stock ideas: Another avoidable reaction is the temptation to look for turnaround opportunities in stocks and sectors where earnings have been worst impacted during this pandemic. There is a segment of investors that believes this to be a temporary pause and once the worst is over, earnings growth will revive to what it was for individual companies. There is no way to verify this expectation empirically today. Says Vikas Gupta, CEO and chief investment strategist, OmniScience Capital, “I would stay away from trying to find any turnaround ideas, specifically in sectors such as aviation and entertainment, thanks to the advent of technology, which was going to hurt anyway.
It would have taken longer, but the pandemic has only accelerated the event. Business travel and movie viewing, for example, were bound to change in a few years. Once the pandemic ends, people may go back, but the scale will not be the same.” While it may look like companies with increasing earnings growth before the pandemic can revive, and those stocks are of good quality available at low prices, one doesn’t know if it will happen. With no visibility on earning growth, these are best left untouched.
High allocation to small caps: This is all the rage in today’s market. The BSE Small cap index has rallied 64 per cent since its low point in March this year. The Sensex rose 50 per cent in comparison. In terms of numbers, there are many more small-cap stocks than those in the large cap category. As the equity markets see an increased participation from retail investors, there is more interest in the small-cap category. However, only a few small caps make it to mid and then to the large cap segment. Stock selection is critical; so is the fact that liquidity in this segment limited. The latter can cause sharp price volatility and you may not be able to sell when you want. Finding good quality in the small-cap segment of the market is hard work, given the limited coverage done by analysts. So, information availability is limited.
When uncertainty is high, it’s prudent to stick to what is well known and analysed than taking a chance with an entity where information is limited and analysis is not widespread.
Timing the correction: You may be tempted, then, to just sit on the side-lines and do nothing, till the pandemic storm blows over, so that you can avoid losing money in a potential correction. That too will be a mistake called opportunity cost. Sitting on the side-lines means your money earns nothing. Gupta says, “While one may be waiting for a correction, you have to ask why you are expecting it. What is the time frame for a correction and the extent of correction; only then will you be able to define when to re-invest. Other than the US elections, there aren’t any other major events on the horizon and this makes the entire process of waiting for a correction highly speculative.
It’s better to pick a well-chosen equity portfolio and start systematic, regular investments.” What you have already invested, is best left in the market and for any incremental money, take the staggered approach mentioned above. Just like the previous correction took everyone by surprise, so will the next one. Keep some dry powder to take advantage, but timing it may end up costing you more in terms of lost opportunity.
Ultimately, returns in equity markets come with the right behaviour. There is little you can do to control stock prices and a lot you can do to avoid making common mistakes. You have to be prepared for a fall in prices, whether over two months or two years and come with a lot of patience and a long-term investment horizon.
(The writer is a freelancer. Views are personal)
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