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48Equity Investing In Times Of Economic StressOct-03-2020

Equity Investing In Times Of Economic Stress

Blog by – Mr. Dhruv Ajmera

Wealth creation is a long term process and online equity trading plays a critical role in it. This is simply because of the fact that equity has traditionally been one of the most preferred asset class chased by investors looking to build wealth over a long term. There are many stock brokers in India providing online trading in equities. However, there is a misconception that times of economic stress like the one we are in right now are not a good period for stock markets. This has turned out to be a misnomer as global as well local stock markets have soared sharply in recent months despite the growing menace of Covid-19. In fact, in India, this is even more aptly displayed as local stocks rose near six month high despite a sharp acceleration in daily cases in August and September. 

The key point to remember is that these gains emerged even as India`s economy recorded a sharp contraction, with a surge in coronavirus infections weighing on the outlook for recovery. Gross domestic product shrank 23.9% in the three months to June from a year earlier.  However, the overall movement in local equity markets over last two decades shows that times of economic stress offer excellent opportunity. Here are a few insights about how to use such periods to your advantage and achieve long term success in share market investing. 

Importance of staying invested – Do not stop investing in an economic downturn. In fact, your SIP holdings will fetch more units in a massive correction in equity markets. Similarly, buying blue chip counters at a cheap prices during deep equity market corrections turns out to be a rewarding strategy for long term investors. If needed, one can reduce the quantum of investment flows but stopping it altogether can affect your long term returns quite significantly. 

Focus on quality stocks – Quality, as they say is the key to identifying good companies which can weather all types of storms in the financial markets and emerge as the winning stocks over a period of time. Thus, these counters offer good capital protection when the markets are sliding and generate significant returns when indices turn higher. Look for companies providing a regular divided and recording strong performance on operating front. 

Looking for cycle beneficiaries – Every down cycle offers opportunities to invest your funds in companies which are leading the market movement during the economic downturn. For instance, the current slide in equities has opened up excellent opportunities in Pharmaceutical and Information Technology sectors given that the structural undertone in these sectors has turned out to be extremely positive despite challenging economic outlook. 

Tracking demographic and behavioural changes – This is probably the most significant factor that investors can use to enhance their long term wealth. Many a times, economic downturns open up new opportunities in hereto unknown areas. New companies tend to swing into action to make use of the changes in demography or long term changes in consumer behaviour. Equity markets tend to reward such companies handsomely over the years. 

Taking stock of personal goals – Economic downturns also offer a good time to introspect on your personal financial goals. May be you need to reassess some of your long term needs and alter them in line with the changing reality around you. This can ensure that your investments are much more attuned to the current economic and financial trends. For instance, a sharp reduction has been noted in interest rates over last few months risk free returns have turned lower too. This in turn means that you need to divert some additional funds earmarked for making fixed deposits or some debt instruments to equity markets. 



Conclusion:

Remember that equity markets tend to discount the worst outcome whenever a massive economic challenge emerges on the horizon. The opposite is also true in the sense that markets tend to overshoot on early signs of economic recovery. Over the long term, markets tend to align themselves with corporate earnings, economic growth and overall changes shaping up the business environment in the country.  This also means that rather than worrying about the economic downturn, a savvy investor has to stay focused on his personal goals and ride out the difficult phases in stock markets to enjoy long term financial well-being.  

Also Read: What is Equity Trading? Meaning, Benefits and Types

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