Recent fall in the market, mainly in the mid-cap and small-cap stocks, is creating confusion and panic amongst most investors. A close look reveals that the market is making no distinction based on the quality of stock. It has been observed that irrespective of the favourable numbers, some of the high-quality companies have fallen sharply that has dented the confidence of even long-term investors.
So, let us understand what must have triggered this fall in the Indian stock market:
- Recent SEBI directive mandating Mutual Funds to sell part of their large and small cap holdings and buy mid-caps in line with the stated objective of the scheme. This has triggered a sharper than expected fall in select small caps. The important point to remember here is that as per SEBI definition, except for first 250 top market cap companies, all remaining companies have been categorized as the small caps. We anticipate that this selling should subside as deadline for this rebalancing is believed to have ended on 31st May.
- Derating of select mid and small caps led by mismatch in expectation verses actuals: The market has waited too long to taste earnings recovery and is not willing to take any chance if earnings recovery remains at a sedated pace than stock market expectation. Derating is the new norm for the companies which have posted earnings lower than the market expectation. Therefore, despite posting growth in numbers, even good quality mid and small cap companies have fallen sharply in the current quarter. To make it worse, bond yields are increasing to reflect market expectation of interest rate hike by the RBI. This spike in bond yields has put further pressure on P/E multiple as normally there is an inverse relation between P/E multiple and bond yields.
So, in this chaos and confusion, what one should be doing and avoiding:
- Conduct fundamental analysis of stocks and base your decision on the underlying business outlook rather than relying completely on stock price movements. It may be a very good idea if you don’t try to judge a book just by its cover. Instead of just looking at the share price, try to spend little more time in understanding the fundamentals of any business that you are holding in your portfolio. Now, why is it important? For most of the good quality companies if the earnings growth has been good, then the recovery will be sharper than the fall and you will eventually be able to reap the benefit of such stock market corrections.
- Top up long term investment in good quality businesses. You must use this opportunity to buy more of the portfolio stocks in a staggered manner, if you have investible surplus.
- Do not worry beyond what is required. If history is to go by, we have witnessed many such downfalls, which come and go. You need not worry if you are holding a good quality stock, which has demonstrated decent growth in the underlying business. Correction in markets then becomes an opportunity for you to buy high-quality stocks at a much lower valuation.
- Do not rely heavily on a few selected businesses, rather construct a well-diversified portfolio consisting of 15 to 18 high-quality stocks. We always stress on this point, that instead of buying few select companies, one should buy all the stocks in the R&R portfolio as per the recommended allocation, which will lend stability to your portfolio in times of correction.
During such volatile markets, how R&R will help you to wherewithal in your wealth creation journey?
- Staying true to our mission of educating our investors, rest assured, we will continuously update you on all the Indian stock market developments and updates as well any important news that may have an impact on your portfolio.
- Recommending portfolio rebalancing opportunities, wherever required, on the basis of the performance of the stocks in your portfolio.
- Last but not the least, we at R&R are committed to the concept of 'Wealth Creation' via long-term equity investment. Flat or slumping markets may hamper your performance in the near future. However, if you are a long-term investor, this is a good news as you can accumulate value businesses at lower prices without worrying about the short-term fluctuations. As explained above, we would like to give you the confidence that we are keeping a hawk’s eye by continuously monitoring all the business in your portfolio. If it is about wealth creation, 'Patience' is the key.
Happy Investing In Stocks!