What to do when the stock market is crashing

The bears have gripped the stock market. After a brief recovery on Tuesday, the Sensex has again shed over 1,200 points in Thursday’s trade after the U.S. Federal Reserve hinted at a rate hike in March 2022. The Sensex is down nearly 6% from its all-time high of 62,245.43 hit on October 19 last year. The broader markets — S&P BSE Midcap and Smallcap indices — are in deeper trouble with up to 13% slump from their respective all-time highs.

Does it worry you? The road ahead is indeed wobbly with the Budget 2022 and state assembly elections lined up, while tensions brew in Russia and Ukraine. But, hold your breath! This is the time to stay sensible. We tell you how to make the most of the market crash:

1) Doing nothing

Sometimes, doing nothing is the best strategy. You may feel jittery about your portfolio crashing like ninepins, but be confident about your stock selection if you believe in their fundamentals. If you feel you do hold stocks that should not be in your portfolio, you should sell those on the first opportunity. Be ruthless in selling your loss-making stocks, but be wise about the timing of it. The day when there is bloodbath on the Dalal Street may not be the right time to purge your portfolio.

2) Be careful in averaging down

One of the most common reaction to the stock market fall is investors buying more of their existing stocks at lower levels. This is called rupee-cost averaging, that is, buying the stocks at different price levels to reduce the average buying price.

While accumulating your winners at lower levels is advisable but doing so with your loss-making stocks may not be a great idea. “Investors should ensure getting rid of junk stocks, or the ones that have witnessed gains just because of the narratives or momentum. In any case, avoid buying more of such stocks with the hope of averaging down,” advises Richa Agarwal, senior research analyst at Equitymaster.

3) Be cautious about new-age firms

A lot of retail investors are invested in stocks of newly listed start-ups such as Paytm, Zomato, Nykaa and others. Most of these stocks have fallen below their issue prices. Investors are worried if they should stay invested, buy on dips or simply sell their holdings. Market watchers believe while the sentiment is not in favour of these internet stocks, but not all are losers. “If we draw references from the dot-com bubble, while majority of the internet-based companies from that time have either gone bankrupt or have been acquired, a few like Amazon have also grown to become giant business and have created immense wealth for their investors,” says Yesha Shah, head - equity research, Samco Securities.

The correct approach is to be selective and avoid mass euphoria. “FOMO based investing needs to be avoided. Instead, one should seek to invest in companies which have strong economic moats, efficient capital allocation, healthy cash flows and a favorable risk-reward,” adds Shah.

4) Go shopping

It is often said that when the market is overvalued, one should book some profits and keep some cash handy. It helps in buying stocks at attractive levels when the market crashes. You must always keep a bucket list of quality stocks ready. Whenever such stocks are available at attractive levels, you must add those in your portfolio. How to create the bucket list, you wonder? Focus on fundamentally strong stocks. Stocks with consistent profits and zero debt which also have double digit Return on Equity (RoE) and Return on Capital Employed (RoCE) must find place in your portfolio.

“This is not the time for speculative investment as the market seems to be volatile. It is important for the investor to de-risk by going for traditional stocks. Quality stocks from agriculture, defense, green mobility, FMCG, Pharma could be some sectors one could look into,” says S Ravi, former chairman of BSE and founder and managing partner of Ravi Rajan & Co.

Agarwal of Equitymaster says there are attractive opportunities, considering both fundamentals and valuations, in the chemical and infra space, or the companies that are critical to infrastructure creation. Well-capitalised NBFCs focusing on retail loans could also be considered, she adds.

Banking and real estate look good to Shah of Samco Securities. “The banking sector’s recent underperformance primarily on account of drawdowns by FIIs combined with improving fundamental metrics and stellar Q3 results, puts it in a sweet spot. Real estate is another sector which is on the cusp of an up-cycle and looks attractive. Certain companies that benefit from the revival in real estate such as those financing housing developers and homebuyers, home improvement companies, can also see good traction going ahead,” he says.

“The industrials space can also do well considering the recovery in domestic demand, improving order inquiries and impetus to manufacturing companies through tax cuts and government schemes,” he adds.

The year 2022 is expected to stay volatile as the easy liquidity will be gone. The companies will be strictly scrutinised on fundamentals as the money finds its way to sound companies having sustainable earnings growth.