The Crash and After

Equity markets are facing another meltdown, more than a decade after the subprime crisis roiled global markets. Such steep corrections - close to 30 per cent-plus in the last couple of months - can make even seasoned investors impatient. So, it is normal for the retail investors to get jittery about their future course of action at this stage.

Some investors may be thinking about exiting, anticipating a further crash, some may be thinking about not putting more money in equities and preferring to wait and watch, while others may be willing to continue their investments but with a lot of anxiety. A courageous lot may be willing to be adventurous and put more money in markets to buy at what many people are saying are low prices.

Is This the Bottom?

Before deciding the course of action, every investor wants to know one thing: is the correction over? There are no easy answers to this. "We are going through a period of unprecedented uncertainty. The inability to visualise duration, economic impact (of lockdowns due to coronavirus), global downtrend and uncertainty have led to markets spiralling downwards. To gauge the time to recovery, one has to have a sense of India after Covid-19. The impact on businesses (micro, small, mid & large), consumption, demand (internal and external), jobs will have a bearing on the economy," says Prashant Joshi, Co-founder and Partner, Fintrust Advisors LLP.

Markets run ahead of time. Coronavirus is creating havoc in Europe and the US, major drivers of the global economy. So far, India has remained relatively less impacted than the rest of the world, though the number of infected is expected to rise in the coming days. The market has factored in the worst. The only uncertainty is around the longevity of the lockdowns, both globally and in India. "This time, circumstances are a little different. We have never witnessed a pandemic in living memory, hence no one is sure about how long this will last, and what impact it will have on various economies and sectors. The recovery could be a bit prolonged due to that," says Sousthav Chakrabarty, Co-founder & CEO, Capital Quotient.

And if things deteriorate significantly, we may see another sharp correction. Otherwise, the markets may remain range-bound, till they see some signs of normalcy. As per Tim Ord of Phillip Capital, up to 90 per cent correction is over. He says the correction may continue till July when Nifty may see 7,000 levels.

Time to Recover

Another big question is: how long will the pandemic last? "We are at the mercy of discovery of vaccinations and cures for this pandemic. This could take days, months, or even a year. What we know is that once we have the solution, Indian markets will bounce back to normalcy. A time-frame cannot be given yet, but yes, given that the crisis is not economic, Indian markets will resuscitate," says Tarun Birani, Founder & CEO, TBNG Capital Advisors.

However, past is a good indicator of the likely recovery period, as biggest crashes in past have been followed by a robust recovery within two-three years. "If you see history, the market has a habit of recovering fast. The crisis is always driven by deficiency of liquidity in the system. When asset prices fall, money is parked into safer havens such as gold/dollar/yen. Once the government comes out with a bailout, either by printing money or providing fiscal benefits, smart money again starts chasing the asset. So, recovery will come, though its intensity is anyone's guess. Even if we fall further, I believe we will be back in less than two years," says Vivek Bajaj, Co-founder, StockEdge.

Most experts say beginning of an sustainable recovery will take at least two-three quarters from here. "We expect stock markets to be volatile, driven by efforts that will shape the future. The stock markets, over a period of eight to 12 months, are expected to take a definitive path as earnings visibility and future growth path for companies become clear," says Joshi of Fintrust Advisors. This means any investing strategy should take into account a prolonged recovery phase.

Different Shades of Recovery

Not all investors have been hurt equally badly. The extent of loss and, hence, the timing of recovery depend upon the point of entry and mode of investment - whether lump sum or systematic (Systematic Investment Plan). "Investors who have been in the market for more than five years might have averaged out their investments," says Hemant Sood, Managing Director, Findoc Financial Services Group. This means they would have bought at lower levels, too, during the period. In comparison, those who entered the market one-two years ago will be staring at losses.

That is why the recovery period will differ for these two sets of investors. "Let me give an example of an index fund. As on April 1, 2020, the trailing returns on Nifty Fund show an approximate dip of 24.7 per cent for a period of one year, while for three and five years, the returns are -0.9 per cent and 1.28 per cent, respectively. So, 10-year and five-year investments will take less time to recover in comparison to a one-year investment," says Birani of TBNG Capital Advisors.

This means that the older the investment period, the lesser will be your loss and the quicker will be your recovery.. However, you may have to wait longer to get to your desired return. "The annualised return is a function of years you have remained invested. A longer duration means a longer period will be required for recovery to meet the expected annualised return expectations," says Bajaj of StockEdge.

Exit or Stop SIP?

Disheartened by losses, many investors may be thinking of exiting equities. However, the question is: where will they invest? Bank fixed deposits (FDs) are giving a 6 per cent return. After tax, this is much less. Some company FDs are giving more but come with higher risk. Gold has of late seen a significant surge that is unlikely to be repeated in the medium term. Real estate is going through a bad phase.

Our example (see Overall Equity Return with Recovery) shows that FDs cannot help you recover your recent loss from equities even in five years. So, keep investing in equities, as that is your best chance of a quick recovery. "SIPs should be continued. A lot of people do value SIPs, which means they invest a large sum when the market is down and less when the market is up. But that requires active engagement. If one cannot do it proactively, one should stick to the basic plan," says Bajaj of StockEdge. Even if you are not comfortable with investing more, stop future investments, but let the current ones continue. However, the best course will be to add equities when they are cheap so that your average cost of purchase comes down and your equity portfolio gives a higher return whenever the market bounces back.

Buy in Staggered Manner

If you have lost money and plan to make a quick buck by investing in current market conditions, it may be a good idea to hold on for a while. "Historically, we have seen that markets can take anywhere from 18 months to 48 months to recover if one has entered at the peak. It is advisable to build a portfolio gradually (irrespective of markets levels) rather than allowing a single price point to impact your returns," says Joshi of Fintrust.

Most seasoned equity investors make volatility their friend as they know that every correction throws an opportunity to buy at lower levels. However, should you time the market and invest surplus at the current level, or do so in a staggered manner? "Investors should increase monthly SIP commitments. This will ensure they average adequately in any further downside we may see. For lump sum investments, we recommend that one should invest only 30 per cent at current levels, 40 per cent at 10 per cent lower levels and balance 30 per cent only if there is a 20 per cent correction from here. This will make the recovery much faster, in as much as 50 per cent lesser time, mathematically," says Chakrabarty of Capital Quotient. Even if you are an adventurous investor with high-risk appetite and wish to invest in the current market, do so only if you have a long-term horizon.

It is not uncommon to find investors betting on wrong stocks which may not deliver result even when markets recover. So, do a thorough research or take professional guidance. "It is important to look at current holdings, the rationale for the holdings and whether they still make sense in today's context. In every fall, we have seen investors averaging and holding onto the same stocks, sectors, fund managers which never recovered, eventually to get disappointed. It is advisable to seek professional advice," says Joshi of Fintrust.

Most of the time, companies that take a lead in market recovery are different from the leaders in the last cycle and only experts can identify these opportunities. "After such severe meltdowns, markets always have a recovery cycle. However, constituents which have led the recovery in previous upcycles (sectors, stocks) have not always been the same," says Joshi of Fintrust. A better way for you is to stick to mutual funds and let experts handle your money.

@naveenkumar