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BW Businessworld

The Market Mirage

A bigger contribution of heavyweights to one’s equity holdings could also help reduce the overall volatility and risk of the portfolio. Another possibility would be to restructure the overall investment portfolio to include a more diversified asset base and perhaps a smaller contribution of equities.

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The pandemic has left the Indian economy, like every other, with a series of countrywide lockdowns, economic slowdown and all-out efforts to boost demand among all this. The fight is of managing the impact of a widespread virus while keeping the economy afloat. Not so effortless when the former requires you to shut down almost every physical activity, disrupting any business in its wake. 

One would think that a slowed economy in lockdown, on the back of continuous liquidity injections and all time low interest rates would find it perplexing to find a clear and defined direction of where it's headed  in the short term, even if there’s a strong long term outlook. The stock market, though, said to be a gauge of economic performance, has indeed found its way, guided by the power of common man.

There's no uncertainty to the fact that aggressive retail buying has sponsored a major part of the rally that stock market has witnessed in the past year and a half. Nifty 50 has seen a staggering rise of over 130% from the low established in March, with the market setting a new high (above the low in March) in 118 of 361 trading sessions since then. That's a number that many people would've found implausible a couple of years back.

But what is driving this incessant appreciate in prices? Is it improved financials? Boosted performance? Or just the expectation of strong recovery post the impact of Covid? Surely, it couldn't move the market this much...

The argument for recovery is sensible, but would have been acceptable for a certain level of recovery. Securities have moved way beyond the valuations they commanded in March and it won't be long before the current levels are realised as unreasonable.

Considering even the 12,000 levels that Nifty saw at the beginning of March, the current level represents a rise of over 40%. If the prices are considered to give a true image of corporate value, such change would imply a similar rise in sustainable cash flows and performance. With the fact that it's made up of giants such as Reliance, Tata Steel, and HDFC, it's hard to believe that the dismal event of a global pandemic, followed by a series of lockdowns, could trigger such a widespread phenomenon of value creation for industry stalwarts.

Investment, today, demands a good degree of caution and risk management. With a much higher number of people invested in stocks and existing investors pouring more into equities, the savings of common investors have displaced the traditional DII and FII holdings by a decent number.

It's not for one person to comment on the decisions of the general investor, but if not complete withdrawal, the investor does need to identify a way to protect such savings against a steep market correction, which might have been impending for quite some time now. Such decline might not be certain, but it is likely, and could wipe out a good chunk of new retail capital.

Hedging one's portfolio could perhaps be one of the best solutions for those who wish to stay invested. A long position (consider this a minor hedging cost) in far expiry Put Options, specially those out of the money, on a broad index such as Nifty, could offer significant safety at a not-so-significant price, in case the market does fall sharply. A put option might not be the most perfect hedge for a portfolio, but be sure that it'll offer you a less anxious and peaceful sleep, knowing that you won't lose a sizeable chunk of wealth in a steep overnight correction.

A bigger contribution of heavyweights to one’s equity holdings could also help reduce the overall volatility and risk of the portfolio. Another possibility would be to restructure the overall investment portfolio to include a more diversified asset base and perhaps a smaller contribution of equities.

Howsoever you choose to protect your wealth, it's sure to drastically improve your confidence in your portfolio and reduce the uneasiness of investing in such times.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


Tags assigned to this article:
indian economy inflation stockmarkets equity markets sensex

Satvik Bansal

The author is Junior Capabilities & Insights Analyst, McKinsey & Company

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