Is it right time to bottom fish on Dalal Street?

Equity market is going through unprecedented correction as the BSE Sensex has fallen by more than 25 per cent to 31,390 at closing on March 16 from its peak of 41,952 registered on January 14, 2020. This has resulted in an erosion of more than Rs 30 lakh crore investor wealth from peak of January 14 to March 13. However, every crash is also known to offer good investment opportunities as many quality stocks become available at cheap valuations. Many investors use this opportunity to buy stocks at rock-bottom prices with hope of significant benefit when the market revives. So should you go for bottom fishing in the current market scenario?

Have we reached the bottom?

Whenever equity market goes through big and prolonged correction, nobody knows where the bottom is and hence there is always a risk of further fall from the point of entry. Have we reached the bottom or is it yet to come? "The current market correction is driven by risk aversion due to the spread of coronavirus across developed nation (after being contained in China and South Korea). Slowdown induced by forced lockdown to prevent the spread of the epidemic is likely to manifest into earnings deceleration/ cuts for next year but it is more or less factored in the price. We are of the opinion that Indian equity markets are currently trading below its intrinsic value, but the markets have a tendency to overreact," says Pankaj Bobade, Head- Fundamental Research, Axis Securities.

"It is very difficult to predict the bottom of the market. India which had so far remained largely unaffected, started witnessing many confirmed cases of coronavirus turning investors fearful. If not continued well, the spread of the virus can have significant impact on the domestic consumption-driven economy which is already under significant pressure. In fact, this event has introduced additional downside risks to our earnings estimates for FY21," says Siddharth Khemka, Head - Retail Research, Motilal Oswal Financial Services.

So, unless the underlying factor that is coronavirus fatality shows early signs of decline, the market will remain on the tenterhooks. Steep correction tastes the patience of many investors and even old investors start thinking of panic selling. "Till we see a semblance of normalcy returning, markets are likely to be under pressure and remain volatile. In such times of global volatility, retail investors should keep calm and not panic," says Khemka.

Should you be the early movers?

Many smart investors use the market corrections to buy cheap. Is it right time for savvy investors to start picking stocks in their portfolio? "Once the virus is contained, markets would stabilise. Even in the past we have seen major economic issues impacting the market, however we have recovered from most of them over time. In fact, such sharp correction and volatility is the friend of long-term investors as it makes good stocks cheaper and attractive," says Khemka of  Motilal Oswal Financial Services.

Past events of market crash offer some lessons as most of these have been followed by good recovery in medium to long term. So, if you are a long-term investor it may make sense to identify good value stocks and start picking. "For investment, any correction above 25 per cent is a good investment opportunity. History suggests there are more than 13 times when Nifty corrected more than 25 per cent and then doubled itself over the next couple of years," says Vishal Wagh, Research Head of Bonanza Portfolio.

When market was trading near all-time high, many investors were just waiting for their turn to invest. They could hardly find any good opportunity as most of the quality stocks were trading at their peak valuations. So these investors will find the current situation very appealing to build their portfolio. "The worries of coronavirus outbreak sure caused the stock-market sell-off which has made a lot of stocks in turn way cheaper than they have been in a long time. I think it's time for the long time investors to put out their baskets to buy more with the available cash, but of course with great prudence. As Warren Buffet has said, 'opportunities come frequently. When it rains gold, put out the bucket, not the thimble'" says Jashan Arora, Director Master Capital Services.

Take precautions

While the current situation may look attractive to many investors, you should stay cautious. "'Market down' prices would have no meaning without the quality as some of the hammered stocks might not revisit the same peak again. Bottom fishing is a selective opportunity that has to be done with all cautiousness," says Arora of Master Capital Services. As you are investing for the long-term, you should make sure that the stocks that you pick are fundamentally strong. "The best strategy for the investors would be to accumulate quality stocks with good fundamentals gradually over the next few weeks and months as they would be the ones which would show fast recovery when the market rises," says Khemka of  Motilal Oswal Financial Services.

The other significant factor is timing and level of exposure that you should have. "In correction, everybody used to be fearful and in those scenarios, the decision-making becomes tough due to the negative environment and emotional blocks. One should start investing in fundamentally strong scrip and Nifty PE trade below 22-20 levels. And investment should be done in a staggered manner," says Wagh of Bonanza Portfolio. It is better to start investments in part and wait for some time to take cue of the market movement to average in case of further fall or to consolidate in case the stocks hold the level of long or start moving up.

When should you avoid?

If you are a risk averse investor and are not comfortable with high volatility in the return on your investment, you should avoid stock buying at this point of time. Even if you wish to invest in equities, you should do it through mutual funds as investment will be managed by dedicated experts who are experienced in managing stock investment during extreme volatility. Investing in index fund in staggered manner or through SIP will be the best course of action.

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