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September sharp stock crashes, a disaster or opportunity for investors?

Monday, October 08, 2018
By Rahul Agarwal

Rahul Agarwal, Director Wealth Discovery EZ Wealth

After an euphoric month of August, Indian markets were setup for some reality check in terms of stock valuations, this coupled with worsening macro-economic parameters due to higher crude prices and record Rupee lows created a perfected recipe for steep corrections. September turned out to be one of the worst months in recent history for the markets with both benchmark indices down by almost seven% for the month. Benchmarks, however do not tell the scale of market correction accurately, the real pain has been felt in the broader markets which is captured in the BSE Midcap and Small Cap indices both were down by 15% and 18% respectively. If we look at individual stocks majority of stocks trading on the Bombay stock exchange are down by 30-40%.

Whether this correction is a disaster or an opportunity depends on the perspective one holds, for long it has been argued that the Indian market is significantly overvalued in comparison to its emerging market peers, other alternative view is that the macro economics are good and just the corporate earnings have to catch up to justify these valuations. It’s our opinion that the current correction in the markets was long overdue and it’s a healthy thing for efficient markets, although the downward trajectory has been a tad steep but nonetheless it has forced some sanity in the markets at-least in the terms of valuations.

The market volatility is not good for investors who do not have an appetite for such wild market gyrations, however this volatility has given traders ample opportunities to make money. For investors who have entered the markets a little late into the August rally this correction would be extremely painful as they would be witnessing significant erosion in their portfolio valuation, an ideal course for such investors is to exit speculative names and book their losses and average down their cost in good names. For long term and value investors, this market crash is an opportunity to accumulate fundamentally strong names with a longer-term horizon. In real world it is almost impossible to time market bottoms therefore the strategy should be to average down as close as one can get to the market bottom and the best way to do this is to buy in small quantities on each dip.

In the current market correction, the price movement has been very drastic and broad-based, therefore there is value picking available in almost all sectors, a good starting point would be to start looking at market leaders in each sector and then see how much they have corrected from their recent highs, if the correction is in the order of 30-40% then select the stock as an ideal candidate for further research. Once you are satisfied with the fundamentals then buy that stock at every market dip, in doing that one can accumulate good quality stocks at reasonable valuations.

Finally, it should be remembered that this is not the worst the Indian markets have seen, the corrections in 2008 were more drastic and long then this current one, Indian economy is much bigger and better poised to withstand short term blips in terms of adverse currency movement and higher crude prices. In due time the markets will be back to their normal course and at that point good quality stocks would be the first one to respond to positive cues and provide handsome returns for the brave investors.

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