The Sensex hit a new 2018 low, as 2 lakh crore investor wealth was destroyed. Interestingly, it was 5 days of successive losses for the Sensex and the Nifty. Here are a few things you should not be doing in a falling market.
Do no rush to buy shares
You should not rush to buy as the markets are still expensive at 23 times trailing p/e on the Sensex. The way the markets collapsed in the last 30 minutes of trade and ended at almost the lowest point of the day suggests that there is more downside risk to the markets.
Trade barriers by the US is still very much possible, which could see another big blow to the market. Global cues are cautious and sharp recovery is unlikely. Even nibbling into stocks at these levels is not a good idea.
Worries over rising bond yields, inflation and rising interest rates is making the market unattractive.
Stay away from small caps
It is also a good idea to stay away from small caps, which anyway are still horribly expensive. Remember, if the benchmark indices fall 1 per cent, small cap index is likely to fall 1.5 per cent. They are high beta and are more volatile. Even then since they have run-up too fast in 2017, they are not attractive at all.
Similar is the case with midcaps. It is advised that if you want to invest large sums, it would be a bad idea to pour huge money into these select stocks. Buying in small lots may still be acceptable.
Stay away from debt ridden companies
It would be a good idea to stay away from highly leveraged debt companies. Interest rates in the economy are going up and SBI has already hiked rates.
Leveraged company would see increase in interest costs and hence lower profitability.
We have probably seen last of the interest rate cuts by the RBI for now. So, it is best to stay away from companies that are leaning towards debt. Apart from this one needs to also be very selective in buying into PSU banks. Go only for the good quality names and there are very few among the PSU banking space.
Do not invest lumpsum in mutual funds
If you study the three year returns of equity mutual funds, you realize that the returns are very ordinary.
For example, HDFC Equity Fund has delivered a three year return of 7.49 per cent, ICICI Value Discovery Fund has generated 5.90 per cent and Aditya Birla SunLife Frontline Equity 7.18 per cent. These are some of the biggest equity fund schemes in the country.
Of course, these days many investors and analysts would like to argue otherwise and get carried away as if Mutual Funds are offering extra ordinary returns.
Investing lumpsum is fraught with risks, though SIPs is a better idea.
Rising interest rates a worry
The real worry for the markets right now is rising interest rates. India's own 10 year has surged to 7.7 per cent from just about 6.7 per cent in July.
As interest rates increase, investors start moving away money into debt, as at least capital remains protected. Rising interest rates would also impact corporate profitability.
In the US the Fed is set to hike interest rates at least three time this year. This may also see a flight of capital from Foreign Portfolio Investors. They have anyway been selling since the start of the year.
Valuations remain expensive
Valuations of Indian stocks remain expensive as markets have rallied over the last 3-4 years, but there has been no corresponding increase in earnings.
For example, the trailing p/e of the Sensex companies is 23 times, as against the long term average of 17 times.
Even based on the Nifty anticipated EPS of Rs 500 for 2017-18, the p/e is more than 20 times. This makes the markets expensive, unless 2018-19 sees earnings growing by 20 per cent for Sensex companies.
Global markets continue to remain volatile and one is not sure what policy maybe announced when.
Stick to quality dividend paying companies
It would be a good idea to stick to good quality names which give you a good dividend yield. For example, HPCL at the current market price may offer you a good dividend yield. Similarly for Chennai Petroleum and Karnataka Bank.