Everybody seems to be talking up stocks and mutual funds these days. And why not! After all, the Indian market has proven to be the most resilient and fastest growing stock market among the big economies.
However, World Bank, in its latest press release, has thrown a wet blanket on the optimistic outlook of Indian investors. It says 2023 is likely to witness a massive global recession, which will also adversely impact the Indian economy.
This implies that foreign institutional investors will pull out, equity prices will drop, and the retail investor may have to incur steep losses.
It is often seen that investors – especially those who are just stepping into the markets – chop and change their strategy during a recession. In fact, some are so affected by the ‘bad’ news that they decide not to take the plunge at all.
Thus, when fear takes over, the general tendency is to exit the potentially volatile market ASAP.
But the hallmark of smart investors is their ability to ride market trends – upward or downward – and use them to maximum benefit.
In the words of the Godfather of investments – Warren Buffett – one should always “be fearful when others are greedy and greedy when others are fearful”.
As per the Buffett school of thought, a recessionary environment is the ideal time to start investing, because everybody has a tendency to sell off and premium stocks are available on heavy discounts.
The strategy of buying when the economy is on tenterhooks is based on two main reasons.
Firstly, the markets have always gone up over the long term. So, if your investment horizon is between 5 to 15 years, there is only one direction in which your corpus is heading – up, up and away, just like Superman!
Secondly, a recessionary sentiment ensures that even bluechip equities are traded at relatively nominal rates, making them easily procurable for small-time retail investors.
The end result – you can buy low due to the imminent fear in the market, and sell high after the market corrects itself, which it almost always does.
Analysing World Bank’s statement
World Bank has stated three reasons behind the precipitating economic slowdown -– central bank interest rate hikes, high inflation, and the Russia-Ukraine conflict.
But most experts feel that the global markets – and especially the Indian market – have already reacted to these developments. For example, between last February and June, the heavy correction seen in Indian stock prices was due to these very factors.
World Bank has also said that if even one of these factors escalates further, the global economy would officially be in a recession.
The right strategy
In this climate of doom and gloom, what should be the right investment strategy?
One should always remember that all successful investments have a crucial element - that of ‘timing the market’.
The essence of timing the market is buying low and selling high.
Historically, we have seen that when the money supply in a market is high, stock prices witness an unprecedented rise. A case in point – when governments pumped trillions of dollars into their economies via post-COVID stimulus packages, the markets rebounded to new highs.
Today, due to rampant inflation, the central banks of all countries have hiked lending rates. As a result, money supply to the markets has been slashed and share prices are in a stasis.
And apparently, this is not the end of it.
The Big Short
The legendary US hedge fund manager Michael Burry, who predicted the 2008 subprime mortgage crisis – and on whom the eminently watchable Hollywood movie, ‘The Big Short’ is based – tweeted this at the start of 2023.
“Inflation peaked. But it is not the last peak of this cycle. We are likely to see CPI lower, possibly negative in 2H 2023, and the US in recession by any definition. Fed will cut and government will stimulate. And we will have another inflation spike. It’s not hard."
What Burry means to say is that inflation will soon hit its peak and stock prices their bottom, making the second half of 2023 the perfect entry point.
But where to invest?
Timing the market is one thing, finding suitable investment instruments (or the right stocks) is quite another.
So, what should be our areas of focus as investors given the current scenario?
The rule of thumb is – whatever the market situation, always invest in good businesses.
To refer to Warren Buffett again – while investing, one should not be too influenced by what’s happening externally. He advises that one should invest in Blue-Chip businesses with high value and let the historical upward trend of the markets do the rest.
“Rule number 1 is to never lose money,” Buffett has often said.
And if, due to a recessionary environment, you are able to pack your portfolio with Blue-Chip stocks at prices 20-30% off their all-time highs, then there can be no better start to your journey to wealth creation.
(Rahul Ghose is Founder - HEDGED, an Algorithm powered advisory platform)
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
As an investment enthusiast and financial expert, my extensive experience and knowledge in the realm of finance equip me to dissect and elucidate the complex concepts intertwined within the article you provided.
The article covers a multitude of financial concepts, providing insights into the current market scenario, investor sentiments during recessions, the impact of global factors on stock markets, and strategies suggested by renowned investors like Warren Buffett and Michael Burry.
Let's break down the key concepts and ideas discussed:
-
Stock Market Resilience and Global Recession: The Indian stock market's resilience and rapid growth among major economies are highlighted. However, the World Bank's forecast of a looming global recession in 2023, attributed to factors such as central bank interest rate hikes, high inflation, and geopolitical tensions, casts a shadow over the optimistic market outlook.
-
Investor Behavior during Recessions: The article delves into investor behavior during recessions, emphasizing how fear can drive investors to exit volatile markets hastily. The reference to Warren Buffett's advice of being "fearful when others are greedy and greedy when others are fearful" underscores the significance of contrarian investing during economic downturns.
-
Rationale Behind Investing During Recessions: The strategy of buying stocks during a recession when prices are low is discussed. It highlights two primary reasons: the long-term upward trajectory of markets and the availability of quality stocks at discounted prices during market downturns, presenting opportunities for substantial gains when the market recovers.
-
World Bank's Statement and Market Reaction: The World Bank's assertion regarding the factors contributing to economic slowdown, such as interest rate hikes, inflation, and geopolitical tensions, and their anticipated impact on global markets, especially in India, is analyzed. Experts suggest that these developments have already influenced market corrections seen in Indian stock prices from the past.
-
Timing the Market and Investment Strategy: The importance of timing the market, particularly buying low and selling high, is emphasized. The article advises investors to focus on the money supply's impact on stock prices and suggests that the current stasis in share prices due to reduced money supply could change, indicating potential future opportunities.
-
Michael Burry's Prediction and Market Entry Point: Reference is made to Michael Burry's prediction of inflation reaching its peak and stock prices hitting their bottom in the latter half of 2023. This is considered an opportune entry point for investors seeking to capitalize on undervalued assets.
-
Choosing Investment Instruments and Focus Areas: While timing the market is crucial, the article stresses the importance of investing in fundamentally strong businesses, echoing Warren Buffett's strategy of focusing on high-value blue-chip stocks. Buffett's advice to invest in quality businesses despite external market conditions is highlighted.
In summary, the article navigates through the complexities of market dynamics, investor psychology during economic downturns, strategies advocated by notable investors, and the significance of selecting robust investment instruments. It underscores the importance of informed decision-making and prudent investment strategies during uncertain economic periods.
