The profound urge to lead the battlefront in the profitable period, with the tendency to flee amidst the critically tough times is inevitable for most of the investors. Amidst the current wave of Covid-19 induced market turmoil, many traders found their steps retreating as the bearish waves drove their mindset. Meanwhile, the soaring uncertainty and the dwindling stock prices mirrored the rising infection and detrimental health conditions across the world
The stock movement is often the reflection of the investor’s sentiments, echoing the deep-rooted fears and glorifying the euphoric ambitions. The investor-led intertwining of the real and secondary markets is evident through the amplification of the stock movements when confronted with the factual circumstances.
Given this backdrop, prudent investment decision amidst the ongoing volatile conditions can typically assist the investors in building a robust portfolio with stronger resilience. Let us look at the five reasons why investing during a tough time may be beneficial, keeping in mind return expectations and risk aversion.
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The volatility in the market scenario and the uncertain operating environment brings the stock prices of even blue-chip companies tumbling down. The bearish phase thus offers investors active price discounts with relatively low price of the stocks. Market fear in the Covid-19 scenario lead to free fall in the share prices, thereby triggering panic selling by several investors.
The contraction in the valuations is evident through the different financial metrics. The Price-to-Earnings Ratio for many blue-chip stocks has fallen signifying potential value investment opportunities. At the same time, the other financial metrics such as Dividend yield, Price-to-Book Ratio also present the case for investment.
Amidst the tough operating times, valuations tend to get cheap, and the probability of making an error on valuation front seem to be perhaps lower viz a viz during bull markets. Investors may consider taking exposure to strong businesses trading at undervalued prices, backed by a combination of fundamental and technical analysis.
The market volatility often exposes the inner strength of the businesses. While companies with strong fundamentals tend to stay afloat, the weaker companies get wiped out. Despite the shortfalls not evident during the stable phases, the critical times separates the strong performers from the fragile ones.
Amidst the dwindling price movements, the investors can short sell using speculation to make a substantial profit. However, it must be primarily undertaken by the experienced investors or with the guidance of experts in the stock market who can predict with relative certainty based on fundamental and technical models.
Meanwhile, the commodity producers may utilise the short hedge by taking the short position in the contract, which protects it from further price downfalls in the future. It may go into prudent management of the inventory.
Economy Building Measures
Government’s proactive lockdown restrictions keeping a check on infection numbers, along with dedicated fiscal measures seem to provide some hope towards a market recovery. Like the stock market downturn during 2008-2009 contributing to generating wider economic shocks, the Covid-19 led stock market turmoil reflects the shortfall in the consumer demand and the supply chain disruptions.
Amidst the potentially difficult operating times, the government’s economic recovery measures in fixing the issues coupled with monetary policy initiatives are often carefully monitored for gauging the market momentum.
The government’s fiscal packages coupled with monetary steps including cash rate cut and open market operations seem to be negating the effect of the crisis to some extent on different sections of the society, providing an opportunity for some investors to anchor their investment models and safe level play to implement the investment ideas.
Better Structuring of Businesses
The tough phase infuses resilience in the operations of the businesses. The companies, when confronted with crisis-like situations, adopt the lean principles and introduce various reforms that go into building cost-effective services. Many organisations, for sustaining through the pandemic, have introduced several practices such as removal of excess workforce and reduction in the management salary or compensation.
Meanwhile, many businesses have adopted technological solutions that promote efficiency and cost reduction, and others have undertaken strategic change in business models.
While restructuring process seems to be effective in ensuring the sustainability of organisations, investors may put strong businesses in their watchlist that have undertaken prudent and strategic business changes to boost their future cashflow.
Uptrend Expected to Follow Downtrend
History has shown evidence of eventual recovery of the stock markets in a phased and timely manner. The world, economies and financial markets not only survived but emerged more potent after each economic crisis.
The turbulence allows the players to gauge on the weaknesses and further implement strategic measures that may ensure resistance to business models. For instance, the ‘housing bubble’ burst in the Great recession prompted the government as well as the lenders to build a conservative mortgage policy that could survive the economic downturns.
The investment in the downtrend phase tends to generate positive cash gains when the market picks up the pace. As the external conditions improve, the businesses post the Covid-19 are expected to pick up the momentum, backed by their recession-proof strategic business decisions. While, the undervalued stocks during the crisis are expected to soar typically in the subsequent recovery phase, investors’ sound investment decision skills are tested for their ability to tap potentially attractive pockets of investment opportunities.
The tough time demands logical investment initiatives rather than inaction from the part of the investors, that would generate substantial returns while also ensuring the investors save themselves from the impending risks.