What Should Be Retail Investors' Strategy In A Bear Market

The Indian equity benchmarks have seen a sharp correction over past few sessions after the Reserve Bank of India surprised the street with hiking interest rates to tame inflation and increasing Cash Reserve Ratio (CRR) to suck out excess liquidity from the banking system. The Sensex and Nifty have fallen over 12 per cent from the record highs hit in October last year.

Persistent selling by foreign institutional investors (FIIs), fears of high inflation impacting profit margins of the companies and rich valuations that markets were commanding are some of the reasons that markets witnessed sharp correction, analysts said. 

Foreign institutional investors have so far this year sold shares worth Rs 1.38 lakh crore, data from National Securities Depository Limited (NSDL) showed. FIIs have turned sellers in the Indian markets owing to rising bond yields in the US and deprecating rupee against the US dollar.

Rupee hit an all-time low of 77.47 against the US dollar on Monday as dollar rose against major currencies.

“Rupee fell to fresh all-time lows today as the dollar rose broadly against its major crosses. Last week's central bank policy action led to heightened volatility in most of the currencies. Stronger dollar and sustained up move in global crude oil price is weighing on the overall market sentiment. This week, focus will be on the inflation number that will be released on the domestic front as well as from the US. We expect the USD-INR (Spot) to trade with a positive bias and quote in the range of 77.20 and 77.80,” said Gaurang Somaiya, Forex & Bullion Analyst, Motilal Oswal Financial Services.

Typically bear markets tend to start when the indices fall 20 per cent from recent highs. Currently the Indian equity benchmarks are down 12.5 per cent from record highs hit in October but the in the current scenario chances of going into the bear markets are quite high, markets participants added.

"If one goes by the commonly accepted definition of a bear market, which is a fall of at least 20 per cent from the top, then we are not even in a bear market yet. Will we eventually reach there? I think the way things are headed, there is a strong chance we will be in a bear market soon," Rahul Shah, co-head of research at Equitymaster told Outlook Business.

How Should Retail Investors Tread The Bear Markets

The surge in equity indices that followed after the removal of lockdowns to counter the Covid-19 pandemic led to a spike in number of retail investors entering the capital markets. The number demat accounts have more than doubled to 7.7 crore in November last year from 3.6 crore in March 2019, according to Sebi.

Since the pandemic-driven lockdowns and work from home culture began, millions of young people have entered the market as first time investors, which was also a period when the benchmarks soared around 150 per cent since the coronavirus-triggered crash in March 2020.

Top brokerages have been opening nearly a million demat accounts since then and almost 75 per cent of them are under-30 investors.

Investors should try and exit bad quality stocks and those which are trading at expensive valuations, advises Shah. He adds that rather than focusing on stocks that have fallen most from the top they should pay attention to the ones trading at discount to their fair values.

"In terms of protecting one's wealth, stocks that are either bad quality or are quite expensive, go down the most in a bear market. And therefore, investors should try and minimise exposure to these stocks. They can maybe book partial profits in good quality stocks that are expensively valued but there is no reason to stay invested in poor quality stocks with a terrible track record and weak balance sheets," Shah said.

"Rather than investing in stocks that have fallen the most from the top, attention should be paid to the ones trading at the biggest discount to their fair values. A stock may be down 50% from the top but it could still be expensive versus a stock that's down 30 per cent but is now trading at a discount to its fair value. There is a real margin of safety in the latter case as opposed to the former," Shah added.

Sectors and Stocks To Focus

The current market scenario is tough one and making money for retail investors will not be easy like they made in 2020-21. However, the investors will have to look for the companies which are debt free, have good cash flows and have minimal impact of inflation, Vijay Chopra of business and financial consulting firm Enoch Ventures told Outlook Business over phone.

"Foreign investors are selling shares and that is being offset by buying by retail investors at high prices and I don't think the retail investors are making money the way they did in 2020-21. The current market scenario is very tough to make money as there are very few pockets of excellence and investors will have to look for companies which are debt free, which have good cash flows and those which have minimal impact of inflation," Chopra said.

He adds that if Nifty falls below 15,800 then it can go down to 15,200-14,800 levels because going ahead rates will go up amid tight liquidity conditions. The government intervention is required in form of tax cuts which will bring some relief to companies and individuals alike

Chopra advises investing in ABB as the company has developed the fastest EV charging platform in the world. 

"Petrochemical shares will do well on the back of good gross refining margins (GRMs), agro chemicals and seed companies should do well ahead of sowing season, sugar companies will do well on the back of expected rise in ethanol blending and defence companies are looking good as they will have minimal impact of inflation," said Chopra.

On the flipside, metal, banking and financial companies are likely to remain under pressure, Chopra added.