Market yet to hit the bottom; here's how to play in times of uncertainty

The Indian market has suffered massive losses in the last few weeks but the benchmark is yet to touch the bottom, CLSA has said.

Market benchmark the Nifty is down 35 percent from its all-time high of 12,430.50, hit in January, due to the relentless selloff in equities as the coronavirus outbreak spooked investors and aggravated worries of a wider economic fallout.

"While the Nifty hit the same level as the low of the global financial crisis (GFC) on trailing PB, it is still at a premium on trailing PE. Using Bloomberg consensus data for 12-month forward multiples, we find 88 percent of Nifty stocks are trading below their respective 10-year average multiples. In fact, 65 percent of stocks are 1 standard deviation below their 10-year average multiples," said CLSA.

As per CLSA, almost 96 percent of Nifty stocks are trading below five-year average multiples with nearly 80 percent of these now even 1 standard deviation below five-year average valuations. Only a few consumer names are trading above their historical average benchmark valuation.

March 2020 may have been a capitulation period but it may be followed by relative apathy before a final bottom. Bottoms in the four prior more than 40 percent declines of the last 30 years took 10-27 months, CLSA said.

How to play in such a market?

The market may remain in the uncertain territory till the outbreak comes under control. Even though the government and the RBI have come out with a raft of steps to help the economy, the market is expecting more measures soon.

"It can be expected that the government will announce the second round of economic relief package before the lockdown is lifted by mid-April. In the anticipation of such a package, the market is likely to witness bounces," said Jimeet Modi, Founder & CEO, SAMCO Securities & StockNote.

A prudent and stock-specific approach is the need of the hour.

"Pharmaceuticals look resilient and seem to be little affected by the lockdown, traders can take long positions in this sector. Financials may rebound after the relief package is announced so one can wait and watch for the time being. As an asset allocation strategy going for quality corporate bonds with yields of around 12 percent or higher would be a good option in these stressful times. Investors are advised to continue their SIPs which would help them take advantage of the irrationally beaten down prices," the CEO of SAMCO Securities said.

Historically, every correction in the market has been followed by a healthy recovery, so market correction is a buying opportunity. The market usually recovers from sharp corrections in a year or two.

Brokerage firm Angel Broking said investing in three-four tranches in high-quality businesses and avoiding sectors that are more vulnerable to the economic slowdown.

For example, some sectors, such as aviation, entertainment, hotels, travel & tourism, etc could take longer time to recover.

"Sectors that can be avoided for the time being are auto and auto ancillary, aviation, weaker financials, metals, hotels, tourism, multiplexes and retail. However, FMCG, select pharma stocks and diagnostics and healthcare sectors are among the sections of the market which are expected to outperform even during the time of stress," Angel Broking said.

It said catching the bottom of the market is practically impossible, so investing at regular intervals, ideally monthly, averages the cost at various market levels and maximises returns.

"Any surplus money that you do not expect to use for any essential expenses over the next three years should be considered for equity investments. Invest in a diversified portfolio. Invest in around 15-20 stocks which are spread across sectors," Angel Broking said.