Month of March has been overwhelming and challenging in all ways possible for all of us, especially with our investments. Nifty Index tanking by around 23% in march alone and most of our portfolios would have eroded by 30-40%.
The question that majority of us have is, can the market correct even further down from current levels?
Let me be honest. I have no clue and most probably no one has too. More than anything, it’s the speed at which correction has taken place that has shocked lot of us. It’s become common now to look at nifty down 2% and not call it a bad day. There was a massive fall of around 4000 points in the Sensex a day before the lock-down and the markets recovered the same and more in the next 4 days. This crazy volatility has really spooked a lot of investors.
The important fact is, volatility is an embedded part of equity investments and will be so for a long time to come. We have seen something of this sort even in the past, in years 1992, 2000, 2008 where the equity returns have come down by almost 50% i.e. INR 1 Lac invested had become INR 50,000.
Looking at the immediate past returns of asset classes and making deployment decisions is probably one of the major things we need to avoid. Irony being, the worse time to invest is when the returns have been good in the recent past and the best time to start investing is when the returns have been sub-optimal or negative.
The ongoing 21 day lock-down is going to impact economic activities and growth strategies. Plant shutdowns, inadequate to Nil capacity utilisations, logistical issues etc. have led many analysts and agencies to predict a global recession, bringing down India’s GDP growth rate estimate to ~2%.
Market PE levels have come down to 17 from highs of 27-28. If you look at the bottoms made in the year 2008, the market PE was at 11. Weak GDP Growth will have an impact on earnings growth. We cannot completely rely on PE for the market when there is too much uncertainty about ‘E’.
Let’s look at some facts and data which are contradicting our "expectations" of a doomsday scenario.
- If we look at rolling returns. Nifty 1 Year returns had a probability of loss at 30% and Nifty 3 Year returns had a probability of loss of around 11%, 5 Year plus period of time nifty has never delivered a negative return. ( Source: JRLmoney.com)
- Another interesting data point to consider is the dividend yield gap. Yield gap is basically the difference between the yield of long term government bonds and the dividend yield at any given time. Bigger the gap, higher the chance to benefit from investing in the equity markets.
Currently the dividend yields are near all-time lows of 1.88% which has further reduced the probability of loss for 1 Year and 3 Year nifty returns from 30% & 11% to 0.4%. (Source: JRLmoney.com)
Probability of loss and the quantum of loss from a 3-5 years horizon is Nil or extremely negligible.
Never a good idea to try and time the markets, so the saying goes. At these levels, it definitely is a no-brainier that we can start allocating to equities in a staggered manner. if we look at the market corrections over the last 2 decades, markets have fallen several times. The average correction between Jan 2000 to Mar 2020 was around 39% and subsequent 1 year and 3 year average returns to any particular correction has been around 52% and 87%.(Source: www.misterbond.in)
Considering the impending pain ahead and all other factors as mentioned above, it definitely makes sense for us to cautiously tread and start nibbling into equities .For investors who are already fully invested, waiting and adding more at lower levels is the best way ahead.
Our two cents
- Let the SIPs continue. Add more slowly in tranches at lower levels
- Do not make a psychological decision and book losses. There is always pain in growth.
Things will return to normalcy, markets will return to mean levels and make new highs. They always do.
Please do reach out to your financial advisor or wealth manager for portfolio allocation planning and advice.
We will be more than happy to give our inputs and strategy ideas to interested investors. You can reach us at email@example.com