The Nifty has dropped almost 24 per cent from peak levels. A drop below 20 per cent is considered a bear market.
Markets have truly reached dismal levels. Several blue chip stocks are now quoting at price to earnings levels between 5 to 10 times one year forward price to earnings multiples, while others can offer you dividend yields of anywhere between 7 to 10 per cent.
Classic example are Indian Oil, Coal India, NMDC etc. These are not stocks like banks that are capable of just going bust. It's almost impossible to create a robust fuel retail network like Indian Oil and Coal India has virtually monopoly in Coal mining. India imports coal and coal demand is unlikely to go away given that it fuels power plants.
In the case of mining companies, dividends are likely to be pretty decent. To be honest, with bank interest rates falling to near 6 per cent, what is the harm if you are likely to get dividend yields ranging from 7 to 10 per cent. In any case, both will are taxable, though dividends are tax free upto Rs 10 lakhs until March 31, 2020.
What we are trying to hint is that dividend yields, p/e multiples and price to book have all become too attractive to ignore.
How do you arrive at the right strategy in a volatile market?
To begin with, we must understand that we are never going to be able to time the market to perfection. This means, you are not going to be able to deploy all money at the lowest possible price.
The right strategy would be to begin nibbling into stocks in a staggered manner. Let's assume that you have a sum of Rs 5 lakh at your disposal to invest. The right thing would be to deploy a little around 20 per cent now, and if the market falls some more, to start deploying another 20 per cent and so on. What if the markets start to suddenly jump from these levels? Our understanding is that it might not. In fact, the infections from coronavirus may take time to abate, which is why we believe a staggered approach to investing would hold one in good stead.
Should the markets recover, even 5 to 10 per cent from here on, individual stocks have the potential of rallying as much as 30 to 40 per cent rather easily. Is there an element of risk still? Of course and even while buying you should brace yourself for a risk of further fall, but, eventually the markets would tend to rise.