Will market volatility continue? Where to invest in volatile times?

In today’s rapidly evolving financial landscape, markets across the globe are experiencing heightened volatility. The aftershocks of the COVID-19 pandemic, coupled with geopolitical tensions, inflationary pressures, and supply chain disruptions, have created an atmosphere of uncertainty. Investors, both seasoned and new, are treading cautiously, trying to decipher the market’s next move.

The Indian stock market, for instance, after reaching its peak in July, has witnessed significant fluctuations, reflecting the broader global trend. Such volatility, while unnerving, also presents unique investment opportunities. As we delve deeper into this topic, we aim to provide a comprehensive understanding of the current scenario, the macroeconomic factors at play, and insights into making informed investment decisions in these turbulent times. Whether you’re looking to safeguard your investments or capitalize on market movements, understanding the root causes and potential trajectories of this volatility is crucial.

Inflation Concerns and Interest Rates

Many economies, including the US and parts of Europe, are witnessing rising inflation. Factors such as supply chain disruptions, increased demand post-lockdowns, and expansive monetary policies have contributed to this inflationary pressure. Central banks worldwide are closely monitoring these trends, and some have already begun tightening monetary policies in response.

With inflation on the rise, there’s growing speculation about potential interest rate hikes by major central banks. The US Federal Reserve, for instance, has hinted at potential rate increases, which could have ripple effects on global markets, especially emerging economies.

Indian Economic Situation

• Inflation has fallen in August’23 from the highs of July
• GDP growth for private consumption over a four-year period has been only 3.5%. The data points towards challenges in boosting consumption growth in the economy
• Urban demand is doing well with improvements in PVs, retail credit growth, domestic passenger traffic numbers
• Weak global cues, economic health concerns, inflation worries, high rates, slowing global economy, risks of an expanded slowdown, and foreign institutional investors (FIIs) selling due to a weaker rupee are factors affecting sentiment

Sector Overview from the House of Wright Research

Defense, Railways & Power

In sectors such as defense, railways , and power which have seen strong participation, the market is split between profit booking and future growth.

1. Profit booking: Even if these sectors experience growth in earnings, volume, and revenue, stock price returns might be subdued. This is because the high valuations have already priced in the anticipated growth for the next few years. High valuations = lower chances of earning returns.
2. Future growth: Another school of thought finds these high valuation sectors could show strong growth opportunities in the longer horizon given robust fundamentals, strong order books, and continued government push. Take into account, upcoming elections in 2024, and government spending in these sectors is unlikely to dip.

Consumption

• Consumption-driven companies seem overvalued despite a weakened consumption backdrop evident from the past three quarters.
• While there are concerns globally about consumption due to inflationary pressures, India’s consumption story is still strong, thanks to its demographic dividend.
• Brands that cater to the aspirational middle class could find greater traction.

Automotive

1. An upswing in auto stocks was witnessed due to improved profitability from 3Q of FY23. This was mainly due to a reduction in commodity prices.
2. However, the scenario has evolved. With rising oil prices (though stagnant diesel and petrol prices) and the depreciation of the rupee, raw material prices are inching upwards.
3. If there isn’t a volume surge and if profitability metrics such as EBITDA margins start to feel the pressure, the market’s reaction might be severe.
4. The current market sentiment appears to be pricing in a lot of positive developments. If these do not materialize, corrections might be in order. If the festive season does not stimulate sufficient demand, the sector might experience substantial correction.

IT & Technology

• Despite IT stocks’ correction from their 2021 highs, it might not be as attractive due to their elevated valuations over an extended period and due to exposure of external market shocks
• Look at stocks that are more India-focused as a hedge against such potential external shocks.
• With increasing digitization and India being a hub for IT services, companies with a diversified client base and innovative solutions might continue to do well.

Banking:

• In the past 2-3 years, India’s banking and financial sector saw significant growth, contributing 30-35% to indices.
• With stable macro indicators and the push towards more financial inclusion, this sector could continue its rally.
• We’ve already seen the likes of private sector banks scaling new highs.

PSUs

• PSU stocks have rallied recently and their business fundamentals have improved – with companies benefiting from B2G contracts.
• Among the subsets within the PSU bucket, railways, defense, and capital goods are favored for the next few years. The defense budget is unlikely to be reduced, making defense stocks appealing.
• Railways are also promising due to increased budgets and a supply challenge, which is considered a good problem as capacities are enhancing.

Infrastructure & Capital Goods

• As India pushes for more infrastructural developments, the capital goods and infra sectors could see significant benefits.
• Companies with solid order books and sound financial health would be the ones to watch out for.

Pharma & Healthcare

• Given the global health crisis we’ve just navigated through, there’s an increased emphasis on healthcare infrastructure and pharmaceutical R&D.
• Companies investing in research and those with a diversified portfolio of medicines might stand out.

Specialty Chemicals

• There’s a recent focus on specialty chemicals, particularly the bromine and fluorine chains. Bromine has potential because of its use in fire retardants and the movement towards bromine derivatives for pharmaceutical and agro industries.
• ” Make in India ” and “China plus one” themes are emphasized in specialty chemicals.

Where to invest in volatile markets?

In the face of market volatility, making informed investment decisions becomes paramount. While turbulent times can be nerve-wracking, they also present unique opportunities for savvy investors. Here’s a guide on where to channel your investments during volatile periods:

1. Diversification is Key: One of the primary strategies to mitigate risk is diversification. By spreading your investments across various asset classes, sectors, and geographies, you can cushion your portfolio against significant downturns in any one area.
2. Defensive Stocks: These are stocks from sectors that remain relatively stable during economic downturns, such as utilities, healthcare, and consumer staples. People will always need electricity, medical care, and food, regardless of economic conditions.
3. Dividend Stocks: Companies that consistently pay dividends can offer a steady stream of income. Even if the stock price drops, the dividend can provide a return on investment.
4. Emerging Markets: While they can be riskier, emerging markets offer growth potential. As developed markets might face stagnation, countries with burgeoning middle classes and rapid industrialization can present investment opportunities.
5. Technology and Innovation: Sectors like AI, space tech , biotechnology, new age tech startups , renewable energy , and e-commerce are driving the future. Investing in innovative companies or sectors can offer substantial returns, though it’s essential to be aware of the associated risks.
6. Bonds and Fixed Income: Consider allocating a portion of your portfolio to government or corporate bonds. They can act as a stabilizing force, providing regular interest income and returning the principal upon maturity.
7. Gold and Precious Metals: Historically, gold has been viewed as a safe-haven asset during turbulent times. Its value often moves inversely to stock markets, making it a good diversification tool.
8. Cash Reserves: Keeping a portion of your portfolio in cash or cash-equivalents allows you to capitalize on investment opportunities as they arise. It also provides liquidity and safety.

Conclusion:

In the end, the journey through volatile markets is as much about mindset as it is about strategy. Embracing change, staying informed, and maintaining a clear vision of one’s financial goals will not only help navigate the stormy waters but also emerge stronger and more resilient on the other side. As the adage goes, “It’s not about timing the market, but time in the market.” Embrace the volatility, stay the course, and let time work its compounding magic.

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