The next 12 months are likely to be volatile for equity investments. This will give way to opportunities to find value bets amidst the noise
The equity markets in India as well as in major developed markets are currently going through a turbulent phase, just short of falling into the ‘bear’ territory. The benchmark Nifty 50 in India has remained below its all-time high of over 18,400 points for over six months now. Globally, the NASDAQ index is currently close to 13,000 points, a significant distance from its peak of 16,200.
There are multiple reasons for this fall in the market. First is the gradual withdrawal of stimulus by central banks across the world. Allowing easy liquidity to curb the harsh economic impact of the Covid-19 pandemic left behind high inflation in most countries. To check the price rise, interest rates have now started going up. Just in the last few weeks, policy rates have gone up by 40 basis points in India and 50 basis points in the US. Then there is the impact of the Russian invasion of Ukraine, which has led to commodity and energy prices shooting up.
In such a situation, retail investors need to pay attention to the changing dynamics and calibrate their steps accordingly. History has time and again shown that adopting a value-based investing approach during chaotic times tends to be a fruitful decision over the long term. This is in addition to following the basics of asset allocation based on their own risk appetite.
What Is Value Investing?
Simply put, it means looking for opportunities that are available at a discount. In stocks, it means carefully choosing companies that are undervalued relative to their potential. There can be multiple reasons for a stock to be undervalued. One is that the company in question hasn’t been in the limelight and hence its good performance has gone unnoticed. The other reason could be that the share price of a company got battered due to external factors, or the stock got hit in a larger market correction, while there has been no fundamental change in the company’s management or business.
We are clearly in the latter situation at present, where broader correction in the market is dragging down prices of stocks that are otherwise fundamentally quite strong.
Then, there are also cyclical changes in particular sectors. A sector that was performing well over the last few years might have reached the overvalued territory, while another sector, which was out of favour in the recent past, might be a value buy at present. For instance, the IT sector witnessed massive traction during the pandemic and delivered unusually high returns in the following quarters. Sectors like realty, travel and hospitality were battered following the stringent lockdown, but once the restrictions were revoked these, segments started performing well.
Why Invest In Value?
Until September 2020, value was out of favour, which was also the case even during 1988-89 and 2007-08 periods. However, as the pandemic eased, value as a theme came into focus. The current geo-political and economic situation is rapidly evolving. Any positive development on the Russia-Ukraine conflict front has the potential to change market sentiment and commodity prices. This, in turn, could affect the economy and markets as well. In other words, financial experts and market watchers have a consensus view that the next 12 months are likely to be volatile for equity investments. This will give way to opportunities to find value bets amidst all the noise. Also, value investing at a time when the market is elevated tends to do well as value focuses on investing in sectors that are out of favour but have long-term value. Therefore, one can consider value funds to meet their long term goals.
For a lay investor, keeping track of every granular detail about a company and consequently looking for value pockets in every market condition is no easy task. So, the practical approach for your long-term financial goals, is to invest in a mutual fund scheme that focuses on the value investing theme. Over the years, in India, value as a theme has evolved and so have the value-oriented mutual funds.
By M. Durgarao, Founder, Mummidi Finserve LLP