Turmoil in the markets: Chances amidst the chaos
2 min read 28 Feb 2022, 10:30 PM ISTMany good quality stocks are available way cheaper than their recent highs
PremiumA correction in the market was long overdue. It has also brought in clear differentiation between the weak and strong fundamental companies. The last three quarters were the best years in terms of year-on-year (y-o-y) earnings growth for Nifty50 in over 15 years. However, it did not reflect in price gain for Nifty50 which gained just 7%. This is because markets are always ahead of the curve (except for any black swan events). Abundant global liquidity and markets sniffing a strong rebound in earnings reflected in markets already commanding peak premium. However, as the strong earnings growth showed up, multiples softened instead of going up, given that it was priced in and further accentuated by foreign institutional investor (FII) driven outflows. This trend, along with recent correction, brought down trailing earnings multiples from lofty levels about a year back by about 43%. Around the same time last year, it was 95% premium over long-term average, now Nifty is just 8% to 10% away from long-term average.
One thing different from the previous correction witnessed in the past few years is that domestic institutional investors (DIIs) have become a force to reckon with. This reflects in the translation of low impact on the markets despite the selling by FIIs. Against an approximate FII outflow of ₹37,300 crore in February till date and ₹41,346 crore in January, DIIs invested ₹33,623 crore and ₹21,928 crore. respectively, helping cushion the volatility despite massive FII driven outflows. The conflict between Russia and Ukraine is still a sudden non-economic causation. And even now, markets are ahead of the curve, responding/correcting on a magnitude not warranted by the nature of conflict engagement.
The current correction in the market is an opportunity
The current market is also an opportunity to invest in a quality portfolio. The key indices are nearly 11-12% off their highs, many good quality stocks are available way cheaper than their recent highs. While a lot of investors take the SIP route to ride through market volatility, this alone cannot do justice to such opportunities. Such corrections present a top-up opportunity offering an attractive ‘opportunity amidst chaos’ for long-term investors. Correction provided a much-needed margin of safety to the investors. This, to me, is the right level, time to invest for the long-term investors. Other than the current geopolitical tension, the pace of monetary tightening by the Fed and evolving stance on quantitative tightening would be closely watched.
Long-term investing works best if invested during dips
For long-term wealth creation, it is vital for an investor to follow discipline and have patience while investing. Apart from the right price to invest at, a portfolio needs to be constructed keeping in mind a multi-cap strategy that is focused on identifying businesses that will benefit from India’s growing GDP. Some key sectors that are likely to do well are banking, consumer discretionary, auto, and information technology.
The long-term story is still intact
Despite short-term headwinds, the long-term India story remains intact. India’s domestic remains to be a big strength. With the literacy rate going up, more and more female and skilled labour joining the workforce—India’s growth story is here to stay. India is on course to be a $6 trillion GDP growth economy and in that journey, the next trillion-dollar GDP growth will get added in an even shorter time, the cost of participation in it for the investors just got discounted making it an even more attractive investment destination!
Akhil Chaturvedi is chief business officer at Motilal Oswal AMC.
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