It has been a tough year for the market as benchmarks have posted gains of 3-5 percent so far against 29-30 percent they had posted during 2017.
Focusing on quality, looking at valuations and looking at long-term factors are some of the few lessons that an investor could learn from 2018 markets, experts said.
It has been a tough year for the market as benchmarks have posted gains of 3-5 percent so far against 29-30 percent they had posted during 2017. The year has been even more challenging for mid and small caps, each index shedding 12-15 percent during the year. In 2017, both categories returned around 50 percent.
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Though such times come and go in the market, experts tell you to keep these five lessons in mind to make an informed investment decision.
Experts believe that an investor must pay heed to valuations of stocks that they wish to buy, sell or hold. Last year witnessed valuations being very expensive and the correction in 2018 was just getting these at the right levels.
“At the end of January 2018, the midcap forward PE was closer to 23x as compared to 19x forward PE of Nifty. Today, post the steep correction, the midcap forward PE has come down to 16x forward PE as compared to 17x forward PE of Nifty,” explained Rusmik Oza, Head of Fundamental Research at Kotak Securities.
AK Prabhakar of IDBI Capital says that investors must know when to cash in on their profits. Whenever valuations have gone haywire, people must know how to generate cash, he said. “When the stocks have performed well and valuations do not justify, investors must take their profit back from the market,” he told Moneycontrol.
Focus on quality
Choosing the right kind of quality stocks remains the key. Companies with strong fundamentals and steady management would always remain a good bet and stand tall during the storm of a correction.
One could also switch from bad or poor quality stock at the peak of the market. “As and when Nifty goes 1 Standard Deviation above its 10-year average valuation and the midcap index goes 2 Standard Deviation above its 10-year average valuation then one should shift from bad/poor quality stocks to good quality stocks,” Oza said.
Meanwhile, Prabhakar of IDBI Capital said that quality holds the key in stock selection. “PC Jeweller, Vakrangee and Quality are all stocks one should avoid. Investors must stick to quality names,” he added.
Avoid sectors with too much one-way consensus
Investors could avoid stocks that are close to perfection (i.e. close to historic high valuations). An example to that, Oza explains, is the case of non-banking financial companies in 2018.
“Similarly, look at good RoE-driven sectors that are out of flavour and have already gone through a 2-year pain cycle. Here, if valuations are lower than the 10-Year averages then it is ideal to take a contra call in the sector with a three-year view. Example of this is the Information Technology sector that was out of flavour for past 2 years but delivered more than 50% return in 2018.”
Sell the greed, but when you see blood
Investors must focus on getting the right timing while choosing a stock. “The moral of 2018 is sell when you see greed and buy when you see blood on the Street. The biggest development for the year is the return of financialisation of savings with retail investor firmly buying equity as an asset class with 5-7 year perspective,” Sanjiv Bhasin, EVP (Markets and Corporate Affairs) at IIFL Securities said.
Believe in long-term returns
Lastly, experts advise investors to always look at the long-term view, while choosing to invest in equities. Historical data suggests that the Sensex and Nifty have given positive returns over the course of decade or two.
As the ace investor Rakesh Jhunjhunwala said, “I’m always bullish on India and do not see any reason to be bearish,” it is important to believe in the return potential of equity markets. While a low-risk investor could look for other savings instruments, equities may tend to give a lot more returns.
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