How to invest when the market is in turmoil

The crash in markets along with impressive earnings growth of companies, especially in sectors such as financials, metals, and energy, has caused the valuations of these indices to come down compared to what they were was just before the market correction witnessed in 2020. The current valuations don’t look expensive compared to long-term averages as well. “Currently, the broad market is trading marginally above the long-term averages," said Vinod Nair, head of research at Geojit Financial Services.

Most market watchers that Mint spoke to say that the markets provide good long-term investment opportunities for investors as a lot of companies are trading at a discount and can be rewarding as the geopolitical tensions ease out.

“On the back of current geopolitical tensions, equity as an asset class tends to outperform inflation as companies pass price hikes to consumers, said Nilesh Shah, group president & MD, Kotak Mahindra Asset Management Company.

Nitasha Shankar, head PRS equity research, Yes Securities, points to the stronger-than-ever balance sheets, the comeback of private capex cycle and public capex as some factors that can aid corporate India, going ahead. Those who are not comfortable with individual stock picking can also consider index investing. Broad-based index funds offer a low-cost avenue to invest in the market and take advantage of a market-wide correction.

Value vs growth

The argument between value and growth approaches of investing is ever-lasting; value investing focuses on companies that are undervalued in the market, while growth focuses on the strong earnings growth of companies.

Value outperformed growth in the last three-year period and five-year period by about 530-660 basis points (as per MSCI value and growth indices), bringing to fore the question of whether value style will continue to outperform or the growth story of India will aid companies with higher earnings growth. Note that in the much longer-term of 10 years, both these indices of the MSCI India delivered similar returns.

While experts’ opinions differ on this question, most concur that we cannot single out one style and invest in one bucket. “While it may sound theoretical, value stocks without earnings catalyst and growth stocks with frothy valuations are equally at risk, said Mayur Patel, fund manager, Listed Equities, IIFL AMC. “So, it’s not about value or growth stocks but it is about the right risk-reward concerning the quantum and longevity of growth."

Concurring with the above point, Shah from Kotak Mahindra AMC said that investors should focus on buying good companies run by good management at good prices.

Attractive pockets

Considering good long-term business outlook and fair valuations, many experts reckon that banks and the capital goods sectors look attractive in the current market. Sectors such as housing and construction, on the back of renewed push on infrastructure, and the pharma space are also good bets.

However, just because commodities and energy prices are going up due to the Russia-Ukraine crisis, people should not rush to invest in these companies, as per these experts. “This trend is expected to change in the medium-term. Developing high exposure to commodity and energy stocks today will work against the medium trend and increase portfolio volatility," observed Nair from Geojit Financial Services.

Further, investors should take a cautious approach to the small-cap space. Stock-specific will be the key in mid and small-caps, as per Nair. “We recommend that in the current volatile environment and based on valuation differences, it will be prudent to be marginally overweight in large-cap and marginally under-weight in small- and mid-cap space," said Shah from Kotak AMC.

Asset allocation

Asset allocation has been a time-tested method to contain losses in any market scenario as it balances the risk and reward aspects of the portfolio. It is nothing but apportioning a portfolio’s assets across asset classes according to an individual’s goals, risk tolerance, and investment horizon. The principles of personal finance, which include diversifying across asset classes by not putting all the eggs in one basket, gains significance during all market times and not just during a volatile period.

“Always keep 3-5 years of cash flow requirements in debt," said Vijai Mantri, co-founder and chief investment strategist, JRL Money.

“After setting aside money for contingency/emergency funds, one can invest in equity on every fall," he added.

Vijay Kedia, founder and MD at Kedia Capital Services, said that gold is the best way to hedge against geo-political tensions and inflation.