Optimist, Pessimist or Pragmatist — The Market is for Everybody

A rollercoaster will underperform the Indian stock markets when measured on volatility. Corrections of between 15& to 35% in mid-cap and small-cap stocks (even more in a few cases) have left many of my friends divided. Some see this as an Aha! moment to capitalize on growth sectors, others are grumpier, wary of further declines. In the middle of them stand I — and my views to make this rollercoaster ride as fun as a real one.

Now before I get on with it, do remember that market volatility is a natural part of investing, and both optimism and pessimism have their merits — in keeping you sane. Stay disciplined, stay informed: in the long-term, the market always rises.

Optimistic? Seize the Opportunity

Every seasoned investor knows that corrections are the time you build positions in promising sectors and companies. Treat it like a denim sale — quality stocks at discounted prices. Here’s my playbook when the Sensex graph (Nifty if you prefer) is headed down.

First, focus on the Sunrise Sectors. A well-diversified basket of stocks is a sure bet when the whole sector is rising. Techie friends tell me we’re in the ‘fourth industrial revolution’. What that means to me as an investor is that some industries are soon going to say bye to us, and our money better move to the ones that promise growth. Here are five I picked, but you do your own research.

1. Defence companies: The Indian government is making a massive push for indigenization of defence acquisition, and those with a keener eye have seen companies like Cochin Shipyard ride the wave. Companies in this sector are on a robust growth trajectory. How do you find them? Look for firms with strong order books and promising cash flow. And bonus: some of them have a good export market as well.

2. Green Energy: Well, solar panels aren’t just getting cheaper by the day, but there’s a push to indigenize them too. And we’re a windy country, and we have the tech brains to build those hydrogen cells. Renewable energy is a global medium- and long-term priority, never mind a few voices here and there. You’re looking at a whole industry with the wind in its sails — and the dividends in your pocket.

3. Electric Vehicles (EVs): As batteries are getting cheaper, cars are getting cheaper — and governments across the world are making it easier to buy and drive EVs. There’s a whole investment portfolio for the picking, from EV manufacturers, battery technology, charging stations, and ancillary providers. One or two companies may turn out to be bad eggs, but on the whole, this is something I am charged up about.

4. Semiconductors: The government’s production-linked incentive (PLI) schemes for semiconductor manufacturing are already drive growth in this critical sector — and cheaper and faster chips are driving the most amazing tech — giving your next million-dollar bet a chance to come true.

5. Artificial Intelligence (AI): It’s the talk of the town (the whole globe actually), as AI-focused companies in software, automation, and analytics are reshaping everything from healthcare to finance to logistics. Firms either developing AI or applying it are automatically sunrising. Those who aren’t doing it — I’ll call sell on those.

Now second. Keep calm and stay pragmatic. Here’s what you would do in my shoes:

1. Diversify, diversify, diversify. Sectors are sunrise, but single companies are unpredictable.
2. Read the balance sheets. Focus on companies with strong fundamentals, solid management, competitive advantages, and reasonable valuations. The P/E ratio and the PE-to-Growth as well.
3. Keep the speculative stocks at arm’s length. Your friend’s, chaiwallah’s or brother-in-law’s hot tip should be in one ear and out the other.
4. Don’t over-leverage your portfolio. I’d prefer a gradual investment strategy, just in the rare case a sunrise sector doesn’t match its hype. A systematic investment plan (SIP) approach, that averages out costs over time, works for some folks.
5. Play the long-term game. All sunrise sectors aren’t the same. Some may deliver tomorrow, some will take a few years to deliver substantial returns.

Pessimistic? Well, Safety First

The Indian economy may be slowing, but as multiple ministers and economic experts have said, the economic fundamentals are strong. There are corrections, but nothing is in free fall. But if you foresee further market declines, it’s reasonable that you will prioritize protecting your capital. That doesn’t mean you don’t get to ride any potential opportunity. Here’s what I will do, if I ever turn pessimistic:

1. Move some money into Safe Harbour. Fixed deposits, government bonds (or treasuries in American parlance), corporate bonds — these offer stable returns with minimal risk. Or better still Liquid Funds that allow you to encash easily and deploy the funds into the equity of some company when the market throws up the opportunity.

2. Keep your Blue-Chips close. They are industry leaders with a history of stable performance, after all. Even during downturns, they don’t slide as much as the others, provide consistent dividends and give you long-term value appreciation.

3. Invest in Dynamic Asset Allocation Funds. These mutual funds do the heavy lifting of shielding you from risk. They adjust their equity and debt exposure based on market conditions.

4. Maintain liquidity. Stash a portion of your funds in instruments like short-term debt funds or high-yield savings accounts. These will help you deal with unforeseen needs.

And here are a few more things that I’ve learned from earlier such slowdowns.

1. Keep an eye out always. There’s always good news lurking around in government announcements, corporate earnings, and global market cues.
2. Prioritize companies with resilient business models and low debt. Today’s blue-chips that fail to evolve are tomorrow’s East India Company.
3. Stay patient and don’t let emotions overtake you. Market corrections are as normal as sunrise and sunset.
4. Use this time to evaluate your journey so far. Eventually you’re investing for yourself — and your long-term objectives are what matter rather than short-term market sentiment.

To End…

Market volatility is unnerving. Sometimes you think you smell an opportunity, sometimes you just sit it out for better days. Remember the basics — aligning your investment strategy with your risk tolerance, financial goals, and market insights. If you’re unsure about which camp you belong to, a balanced strategy is the best option.

Combining equity investments in blue-chip and mid-cap stocks with allocations to debt instruments can provide stability — while still leaving you open to growth. Additionally, maintaining an emergency fund and diversifying across asset classes can help you weather market uncertainties with confidence.