Market Meltdown – An Opportunity?

With contributions from Mr. Kunal

In the recent days, the markets plummeted from their august peaks by 14% approximately due to the various macroeconomic and microeconomic headwinds. Should this fall be a reason for panic? The answer to this is, absolutely not. The markets have seen such falls in the past and have recovered over due course. During such falls the best defence is to keep only fundamentally strong companies in your portfolio and that is exactly what we do for our clients.

Random Approach to Investment

An individual without much knowledge enters capital market and goes by rumours or hearsay to invest in random companies not backed up by any logic, will in most cases end up with negative results. Taking the current meltdown into account we created 100 random portfolios from CNX 500, having an investment size of Rupees Five Lakhs with 5 stocks in each portfolio starting from the date 29^th Jan 2018( Previous day when Nifty peaked) to the 26^th of October 2018:

(Note: Taken 100 random portfolio combinations)

The study showed that 100% of the random portfolios gave a negative return during this period. In the table above, since the stocks are picked on an irrational basis, the degree of negative returns is very high and that is exactly why stocks need to be picked based on the fundamental merits of companies. Yes, in the short run due to a meltdown in the market even the stocks of such fundamentally strong companies will fall in tandem, but over time they are most likely to reach their potential resulting in decent returns to investors.

Current Corporate Performance

In fact, such bearish periods are the best time for an individual, to make an additional investment or start an investment, since stocks will be trading at a value lower than their intrinsic value. Therefore undervalued stocks with scope to grow can prove to be highly profitable in the long run and this can be achieved if a scientific process of investment is followed.

When we studied the operational performance of the Companies with a market cap of more than 1000cr, we found that out of 175 companies that announced results 133 companies have shown positive earnings growth from their previous TTM(Trailing Twelve Months). The overall corporate performances show no signs of worry and therefore investing in companies with strong fundamentals that have performed in the latest period is a key factor. Since the market currently is being driven by external factors, the fundamentals seem to have taken a back seat but this cannot last for long. India, being a world leader in terms of rate of GDP growth, has a huge scope for growth in the future and the same will be reflected in the markets. There is no need to be alarmed if you have made the right investments.

Reflections on Past Performance

To show that corrections provide an opportune time to invest, we picked up all the dates from 1^st Jan 2003 to 1^st June 2016 wherein the market (Nifty) was in a correction (15% or more) from their peaks. We found that there were around 1345 such days during which the market was in a correction from its peaks. On each of these days we ran an Investment in Nifty and an investment in our product BIO Growth and let the investments run for a period of 5 years. If anytime during the 5 years of the investment nifty gave a 10% CAGR we considered the investment a success and the same procedure was followed for BIO Growth, the only difference being the benchmark return was 15% CAGR for BIO Growth.

From the data collected we observed that Nifty gave an overall success rate of 89%, meaning out of those 1345 investments made during the phase of corrections 1194 of the investments gave a CAGR of 10% or more in at least one of the 5 years of the investment. On the other hand, Bio Growth had an overall success rate of 97% with a return of 15%. When we increased the CAGR from 15% to 20% for BIO Growth, the success rate was 94% which is still much higher than that of Nifty at a 10% CAGR. This goes on to prove the importance of adopting time-tested and proven scientific processes for your investment that will help you convert such declines into opportunities to make money while beating the index with a big margin.

On 26^th October 2018, Nifty stood pretty close to 15% correction from its peak and offers a mouth watering chance to invest and reap profits in the next few years. Backed by 100% automated and process driven strategies, BIO Growth from Vivekam is perfectly positioned to capture the next big move, whenever it happens. We sincerely urge all our clients to consider parking some of their funds now to enjoy superior risk adjusted returns over time.