A correction in the market was long overdue. It has also brought a clear distinction between weak and strong fundamental companies. The last three quarters were the best years in more than 15 years in terms of year-on-year (YoY) earnings growth for the Nifty50. However, this did not reflect in the price gains for the Nifty 50, which rose just 7%. This is because the markets are always ahead of the curve (except in any Black Swan event). Abundant global liquidity and markets are already sniffing out a strong rebound in earnings reflected in markets capturing peak premiums. However, as strong earnings growth appeared, the multiplier softened instead of rising, given that it was priced in and was further boosted by foreign institutional investor (FII)-driven outflows. This trend, coupled with a recent correction, brought down the trailing earnings multiples by about 43% from the highs almost a year ago. Around the same time last year, it was a 95% premium to the long term average, now Nifty is just 8% to 10% off the long term average.
A different thing from the previous corrections witnessed over the years is that domestic institutional investors (DIIs) have become a force to be reckoned with. This translates to lesser impact on the markets despite the sell-off by FIIs. Against a projected FII outflow 37,300 crore so far in February and 41,346 crore in January, DII invested 33,623 crore and 21,928 crores. This, respectively, helps reduce volatility despite massive FII driven outflows. The conflict between Russia and Ukraine is still a sudden non-economic cause. And even now, the markets are ahead of the curve, reacting/correcting to a magnitude that is not necessarily true by the nature of the conflict.
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Current correction in the market is an opportunity
The current market is also an opportunity to invest in a quality portfolio. Major indices are down about 11-12% from their highs, with many good quality stocks available cheaper than their recent highs. While a lot of investors take the SIP route to ride through the market volatility, it alone cannot do justice to such opportunities. Such corrections present a top-up opportunity for long-term investors, offering an attractive ‘opportunity amidst the chaos’. The correction provided investors with a much-needed margin of safety. For me, this is the right level of investment for long term investors. In addition to current geopolitical tensions, the pace of monetary tightening by the Fed and the evolving stance on quantitative tightening will be closely watched.
Long term investments work best if invested during dips
For long term wealth creation, it is important for the investor to follow discipline and be patient while investing. Apart from the right price to invest, there is a need to build a portfolio keeping in mind a multi-cap strategy that focuses on identifying businesses that will benefit from India’s rising GDP. Some of the key sectors like banking, consumer discretionary, auto and information technology are likely to do well.
Long term story still intact
Despite short-term adversities, India’s long-term story remains intact. India continues to be a major domestic force. With literacy rates rising, more and more women and skilled workers are joining the workforce – India’s growth story is here to stay. India is on course to become a $6 trillion GDP growth economy and in that journey, the next trillion-dollar GDP growth will add up in even less time, making the cost of participation even higher for investors. Attractive investment destination!
Akhil Chaturvedi is the Chief Business Officer at Motilal Oswal AMC.
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