Manage Volatility with Patient Investment
The market has entered an interesting phase. There are tailwinds and headwinds in the path of market’s journey. At this juncture, investors should take a clearheaded stance on investment, without speculating on which way the markets will move in the short-term.
Narrow Rally Lifts Nifty above 11000
Nifty conquered 11000 again on February 6, breaking a five-month range. The resistance at 10800 has been broken by this rally, led by huge delivery-based buying in a few stocks. It is important to appreciate the fact that this is a very narrow rally led by a few stocks. Presently six stocks – HDFC Bank, HDFC, Reliance, TCS, Infosys and ICICI – account for around 50 per cent weightage in Nifty. If we add ITC and Kotak Bank to this list, the weightage would be 60.7 per cent. Nifty’s impressive performance is due to the strength of these stocks.
Carnage below the Surface
If we look below this impressive Nifty surface, there is carnage in the broader market, particularly in mid and small-caps. By mid-March Nifty has given 2.04 per cent YTD returns; but Nifty mid-cap is down 22.53 per cent and Nifty small-cap is down 36.28 per cent. Retail investors who usually have a very high weightage in mid and small-caps have taken big hits in their portfolios. But I feel that the selling in mid and small-caps has been overdone; now is the time to slowly accumulate quality mid-caps.
Why this Bi-polar Market?
An important development that has led to this bi-polar market – a few stocks leading the rally while others languishing – is the change in monetary stance of the US central bank. The FOMC meet held during the end of January not only kept interest rates unchanged, but also indicated that rate increase was on hold due to concerns over global growth. The US 10-year yield fell to 2.66 per cent and the dollar index weakened.
This dovish Fed stance has facilitated a risk-on in markets: resumption of investment in risky assets like equity, corporate bonds, EM equities and some currencies. Lot of money is flowing into ETFs. High quality large-caps with good earnings visibility are attracting huge delivery-based investment buying. This has been the prime mover of the rally which took Nifty beyond 11000. But the Nifty couldn’t sustain above 11000 and lack of follow up buying pulled it down to 10746 by mid-March.
RBI turns Pro-growth and Cuts Rates
Another tailwind for the market is the RBI’s dovish monetary stance. While the change in RBI’s monetary stance from ‘calibrated tightening’ to neutral was on expected lines, the rate cut took some sections of the market by surprise. The decision to cut the policy rates is a clear indication that the central bank is now giving lot of importance to growth. This approach can be justified in the context of the RBI consistently undershooting its inflation forecasts. Though the stance is neutral, the tone of the policy is distinctly dovish. One more rate cut is on the cards, perhaps as early as in April policy; of course, it will be data-dependent. This accommodative monetary stance augurs well for the markets.
Meanwhile, concerns regarding global growth and global trade continue. Domestically, there are concerns regarding the fiscal deficit, stemming from the welfare initiatives of the interim budget.
‘Calibrated Accumulation’ would be the Best Strategy
Investors should not panic from market corrections. Many investors feel that the market will crash after the elections and that would be the time to buy. Experience tells us that this approach is faulty. Actually those who invested before the elections made money. Investors should continue with their SIPs and scale up their SIPs, if possible. Quality stocks may be bought in installments: ‘Calibrated Accumulation’ of good quality stocks and patiently continuing with SIPs should be the ideal investor stance, going forward.
Dr. V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services