Afraid of Stock Markets, Know Why it is Safe to Invest Now
It is 17th June 2022 — doom and gloom everywhere. Indian markets are falling and falling. You turn on the TV and it is all negative news: Inflation worries, US recession, Russia-Ukraine war etc etc etc.
2021 witnessed an explosion of retail investor participation in the Indian stock markets. Attracted by the ferocious bull run, a vast number, majority being first-time investors, got lured by the illusion of high returns. All was good till the time bulls were in charge but come Oct 2021, bears took an upper hand and most were caught off guard. Ironically, no one gets a calendar notice announcing the time, nature and projected magnitude of future dips.
Most investors, who entered the market in 2021, would have lost almost all the gains by now. Not only the regret of not having sold earlier irks them, they are deeply concerned about the further erosion in the portfolio value. It is a panic like situation. So while some, who cannot stomach the losses, are desperately waiting for a rebound to sell, others are frozen. They don’t know what to do.
Stock market crashes are not uncommon. Markets have crashed and recovered many times earlier as well but only those who could stomach the volatility got rewarded by high double digit returns.
So here is a piece of advice:
It is time to buy. Stocks are on sale and if you invest now, your future self will thank you for pulling the trigger when other investors are huddled on the sidelines or headed for the exits.
Keep reading and I will give you enough reasons why I am suggesting to buy now.
Reason 1: We have lived through 2008 financial crisis and 2020 health crisis. Both the times markets crashed and recovered, though the magnitude of fall and recovery time varied. Compared to these periods, we are in a far better situation now. So if markets could recover then, why not now.
2008 financial crisis was a period of great recession that originated in United States but quickly spread to other countries. Stock markets plummeted worldwide. Nifty 50 fell 65% from the previous highs in Jan 2008. There was panic everywhere and it lasted for about a year. However, with government intervention, slowly the economy recovered and by Nov 2010, Nifty 50 was back to all time highs.
In Jan 2020, stock markets across the world suddenly crashed after growing instability due to the Covid-19 pandemic. Per the media publications, COVID-19 recession saw the fastest and steepest downgrades in consensus growth projections among all global recessions since 1990. But inspite of so much of pessimism and despair in the air, crash lasted for only three months to be followed by a fierce rally that lasted for about 20 months. Who would have imagined that ?
Reason 2: Stock market returns are linked to the performance of the business. As long as the businesses continue to grow profits, stock markets will do well. It is just a matter of time.
Just yesterday, advance tax collection numbers were released. Total advance tax collection, including corporate and personal income tax, soared 48 per cent to Rs 42,679 crore in the first quarter of the current financial year 2022–23. Advance tax payment is a reflection of performance of the economy and higher collection suggests higher profitability.
Reason 3: Since the onset of Russia Ukraine war, markets have been falling on the pretext that higher interest rates will slow down the economy. However, here is a counter-intuitive view:
While interest rates are an important factor, historically returns are more determined by the underlying growth and less by the interest rates. Almost a third of the profits of Nifty 50 come from banks. Inflation goes up, interest rates go up and bank NIMs improve. Then another quarter to a third of the profits of Nifty come from commodities and pharmaceuticals which again is not impacted by inflation. The only place where inflationary pressures could hurt margins is the consumer space in India. Staples and discretionary stand for 10 to 20% of the profit pool of Nifty. Over time even these companies will pass on the cost hikes to consumers with a lag.
Secondly, the corporate leverage in India is at a 10–15 year low and hence the impact of rising rates should be quite muted for some time. In fact, many cash rich balance sheets will earn higher income if interest rates go higher.
So essentially what it means is that inflation will probably lead to some earnings upgrade and not downgrades.
Reason 4: Here’s a table that was published by one of the popular media sites. It shows the rolling return of the NIFTY 500 index for several periods.
Rolling returns give you a fair idea about the probability of earning a certain percentage of returns, irrespective of whether you invested in a bull market or a bear market.
From the above table, it is clear that those who stayed invested for 15 years, earned more than 12% returns almost 9 out of 10 times. One needs to remain invested for at-least 5 years to eliminate the risk of losses while massively increase the probability of earning double digit returns. So by this logic, even if you invested in 2021 and are sitting on losses, don’t sell. Sit tight and watch your portfolio slowly recover and earn double digit returns. And if you can’t remain invested for this long, then equities is not meant for you. Instead invest in fixed deposits or bonds.
Reason 5:
If you look at the Nifty 50 monthly chart for last 20 years, only twice the price has fallen below EMA 50, one during the 2008 financial crisis and other during 2020 pandemic. Rest of the times, Nifty has rebounded from EMA 50 levels. So based on the underlying assumption that current situation isn’t as bad, it is fair to believe that Nifty 50 will at best fall till EMA 50 i.e 13600. We are barely 10% away from this level. But should we wait till then. Not really because between now and 13600, we have a strong support zone at14500–14900 levels. What if the markets rebound from this zone? So instead, one should start investing when Nifty hits this zone. If Nifty falls to EMA 50 level, you can invest more. This way you are invested whenever the rebound happens. Trust me it is very hard to invest at higher levels, when you have seen levels 15–20% lower.
Reason 6:
In the above graph, while blue line represents NIFTY 50, orange line represents NIFTY 50 PE. Current PE at 18.92 is near the 5 year low. 5 year range is [17.15 - 42]. Anytime in the past, any investment made at these levels would have delivered huge returns and these times are no different.
In a nutshell, you have enough data points now to help you overcome the fear and be willing to snap up the investments available at cheap prices. Ultimately, the real key to successful investing is to have the courage to buy when others are fearful. Time and again, history has proven that upping one’s comfort in investing pays off over time.
