Dear Advisory Client,
The business conditions are tough with weak consumer demand and a lending slowdown on the back of banks facing rising bad loans and NBFCs seeing a liquidity freeze. The weak business conditions are reflected in the earnings of corporates, which in turn is bringing down their stock prices. The investing environment is typical of a slowdown in the economy and earnings and investor sentiment is low, as the values of their portfolios are dropping.
In this downturn, how does one invest? or should one invest at all? Why were profits not booked earlier or losses cut fast? These are normal questions from investors and the answer depends on the nature of investments rather than the market itself.
In a downturn it is actually much easier to spot the good companies, as companies that can grow market share or maintain share, stay positive cash flow and have low debt are the ones that will come out flying as business conditions improve. There is also no hurry to invest on fears that prices will runaway, prices are more likely to come off as earnings weaken.
One should definitely invest in a downturn, taking it slow and steady. If one is already invested and the portfolio is constructed of stocks that will outshine on the upturn, the portfolio should be held and added to if there are fresh funds available.
On booking profits or losses, it is more for investors who are not able to withstand portfolio depreciation, either due to risk aversion or due to lack of staying power. Hence at the time of investment, it is important to answer the question, how much portfolio loss can you bear. Normally investors are able to bear upto 25% to 30% loss in portfolio value.
It is also important to look at the portfolio as a whole rather than a single stock. In this market, many stocks have seen fall in prices of 40% and higher, even very good companies. However, fall in prices of a few stocks are tempered by rise in prices of others or stable prices, which helps the whole portfolio despite sharp losses in a few stocks.
Communication is also important from your advisor, which shows that there is strong analytical and tracking set up that keeps the investor at the front. Investors who have invested in financial products without doing much initial research face the problem of wondering what to do when there are sharp losses, due to clear lack of communication.
The market will be volatile but this can be ridden for strong future gains.