Sensex down almost 2% in two days; is it time to change investment strategy?

Sensex and Nifty hit their fresh record highs of 67,619.17 and 19,991.85, respectively, on Thursday (July 20). On Monday (July 24), Sensex closed 299 points, or 0.45 per cent, lower at 66,384.78 while the Nifty closed at 19,672.35, down 73 points, or 0.37 per cent.

Why is the market falling?

The domestic market is witnessing profit booking at higher levels because of concerns over valuation. Moreover, most positives are already on the table so the market is finding it difficult to maintain altitude.

“Investors should keep in mind the fact that at the current Nifty PE (price-to-earnings ratio) of above 20 based on FY 24 estimated earnings, so there is no valuation comfort in the market. Barring the US, India is the most expensive market in the world now. At high valuations, some negative triggers can lead to a sharp correction. But in the near term the party may continue,” said V K Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

The market is also slightly cautious ahead of major central bank meetings, including the Federal Reserve, European Central Bank and Bank of Japan meeting this week.

The market probably has discounted a 25 bps hike by the Fed on Wednesday (July 26) but the key thing to focus on is how the Fed assesses current trends in inflation and how it sees the future rate hike trajectory.

Read more: Sensex, Nifty fall for the second straight day; RIL, ITC among top drags; mid, smallcaps outperform

Time to change investment strategy?

Experts do not see the ongoing correction as a major concern and don’t suggest trimming exposure to equities. In fact, they believe this is an opportunity to buy quality stocks. Some of them still find valuations at reasonable levels.

Rakesh Parekh, MD, Portfolio Management Services at JM Financial Services observed that the Indian markets have now crossed all-time highs in terms of absolute valuations and as India Inc.’s earnings are expected to remain healthy, there is no reason investors should not bet on the Indian market.

“We are at peak index level, however, we are still trading close to the last five-year average of around 20 times forward PE. Our earnings growth trajectory is expected at around 15 per cent CAGR in the next two years which is clearly on the upswing compared to the rest of the world. Hence, strong investor interest in India is not unwarranted,” Parekh said.

“We expect India to continue to relatively outperform its peers over the next six months for the remainder of the calendar year 2023 (CY2023). In case the US undergoes a stronger-than-expected recession, Indian markets would also fall, or have a time-wise correction. However, we do not expect it to be significant due to stronger growth in India,” said Parekh.

Parekh said investors should add stocks on every decline.

“We would encourage investors to add stocks on every decline. There are certain investments/stocks which have become very expensive, or where the business fundamentals and outlook remains weak. In these cases, we suggest investors should remain focused on the fundamental strengths and long-term structural opportunities of these businesses. A combination of both will serve investors well in the foreseeable future, as India remains one of the world’s fastest-growing large economies,” he said.

No mindless buying, please

While the market is expected to grow in the medium to long term, mindless buying can only harm investors.

Jinesh Gopani, Head of Equity at Axis Mutual Fund pointed out that with markets currently near all-time highs and ‘animal spirits’ back in action, come two irrational behavioural attributes – “the fear of missing out (FOMO)” the rally and the “greed” for more.

Gopani said this tendency is more visible for first-time investors and with ones having a smaller exposure to equities. In both cases, investors tend to put in a lumpsum with the belief of either starting to invest or making a short-term gain or trying to time the market and this is where the penny drops, most times.

“We advocate a long-term view to investing irrespective of the short-term movements and the noise around you. Focus on your goals, risk appetite, time horizon, and the right diversification strategies, all with a systematic investment plan. Rest everything will fall into place, and you would not be prompted to buy aimlessly,” said Gopani.

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Disclaimer: The views and recommendations above are those of individual analysts and broking companies, not of Mint. We advise investors to check with certified experts before taking any investment decisions.

Updated: 24 Jul 2023, 07:37 PM IST