What should investors do as markets swing? Keep calm and carry on, experts say

Markets have recouped some of these losses in the recent trading sessions. So should investors stay put, increase their equity exposure, or cut their positions?

At the Mint Money Festival 2024, held on 22 November in Mumbai, market veterans shared their outlook and addressed several questions from investors. Here are some key talking points.

Fear vs greed

Foreign portfolio investors have net sold ₹1.16 trillion worth of Indian equities in the past three months. While near-term volatility from this is likely to continue, experts were all of the view that long-term investors should be greedy and look to buy the dip.

Nilesh Shah, group president & managing director of Kotak Mahindra Asset Management Company, said this may not be a good time to be a trader because of the high market volatility, but long-term investors should look to increase their equity exposure.

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“We were the most admired story a few months ago, and while we are not in the most-hated zone, we are definitely in the neglected zone, so it is a great opportunity to rebuild. It is time to be greedy,” said Sandeep Tandon, chief executive officer of Quant Mutual Fund.

Aashish P Somaiyaa, executive director & chief executive officer, White Oak Capital, said markets are likely to face more turbulence before things get back on track, but that he remains bullish on the Indian market’s long-term prospects.

Temper your expectations

Experts said the biggest risk is the unreasonable expectations of investors. “With the kind of returns markets have given in the last three to four years, investors may be disappointed if they expect to see a repeat of those returns in near future. They need to ride out this period of volatility and stay put,” said Kailash Kulkarni, chief executive officer of HSBC Mutual Fund.

Tandon added, “Those kind of expectations need to be pared down or there will be disappointment.”

Asked by an audience member what thumb rule experts use when investing in markets, Kulkarni said. “We talk about Indian stock markets giving 14.5% annualised returns over the past 30 years, which is 50% higher than the risk-free returns offered by government bonds. Investors should also use the same matrix to determine what they should expect from the market. Take what government bonds are giving today and add 50% to that. So expected returns should be in the low double digits. You can add 1-2% additional alpha from good fund managers. That is a realistic expectation and not the 20-30% based on the past three years,” he said.

The China opportunity

Experts said Indian markets also stand to gain from issues in the Chinese markets. 

Shah said, “Unlike India, where there are companies that have not diluted their capital over decades, Chinese companies have kept on diluting their equity capital, which is why the economy’s strong growth has not translated into proportionate EPS (earnings per share) growth. It is not that the Chinese profit pool hasn’t expanded, they just keep on diluting equity capital, which has led to a depressed return on equity.”

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“The reason is that there is a lack of efficient capital allocation, while Indian companies by and large have been efficient at allocating capital. Over the past 10 years, the Nifty 50 Index’s EPS has grown by 166% in rupee terms, while the CSI 300’s EPS growth is just 10% in renminbi terms.”

CSI 300 stands for China Securities Index 300, a stock market index that tracks the 300 top stocks traded on the Shanghai and Shenzhen stock exchanges in China.

Somaiyaa added that for economic growth to translate into corporate earnings, a strong structure around the economy is required. “First and foremost you need a democracy and a stable government to ensure your profits aren’t erased overnight by a sudden government decision. You need a strong regulatory framework, functioning market mechanisms and strong corporate governance standards to ensure investors’ interests are protected,” he said.

Domestic investors hold the fort

While FPIs have been net sellers in recent months, experts said inflows from mutual funds have ensured there is adequate support for markets.

“There was a time when markets would correct sharply and then fund managers would call investors to explain that long-term is good and this is just a short-term correction. Now, the tables have turned. Whenever there is a correction, we see several investors not only sticking to their investments but also adding to them to take advantage of the correction,” Shah said.

Abhijit Bhave, managing director and chief executive of Equirus Wealth, said the ₹25,000 crore worth of systematic investment plans (SIPs) have been a strong source of support for markets amid the FPI selloff. Somaiyaa added that these flows are likely to be more sustainable than in the past as the new generation of investors has a much higher risk tolerance than previous ones.

Which sectors should you look at?

The experts said they were bullish on companies with earnings linked to rural India. “We expect to see more opportunities in consumption-oriented names where earnings are linked to rural India, including tier-3 cities, where there has been good spending capacit since the monsoon ,” said Bhave.

Somaiyaa said instead of looking for sectors that have fallen a lot during the market correction, investors should look at sectors that have fallen the least. “These sectors tend to do well in the next upmove,” he said.

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Asked by an audience member why the defence sector has not done as well as expected of late, Tandon said there was previously a lot of euphoria around this sector. “Everyone was chasing this sector. It got into ‘most-admired’ territory. When expectations are so high and there is a euphoric move, you are bound to see a correction. There can be problems in the near term but the defence sector still makes sense over the long-term,” he said.