Volatility is the rate at which the price of the main indices (market) or a security changes on a daily basis. Volatility is also referred to as the increasing price of the stock, which investors do not generally associate with risk. However, when the market or stock prices fluctuate rapidly with a negative trend, it haunts the financial market due to the loss in value.
Generally, volatility is triggered by a change in government policy, economic outlook, political risk, regulatory rules, industry growth, climate change, and company-specific developments. The market has the paradox to overreact, especially during optimistic and pessimistic periods.
The daily volatility could be due to a varied set of factors impacting the demand & supply, and liquidity of a stock. The market is usually in an imbalance in the short-term, overbought and oversold territory, but tends to move towards a fair level in the medium to long-term.
Volatility is the daily crux of the market. Rather than a concern, it should be used as a motivation to capitalize on the imbalances. It may unsettle us in the short-term, but by accepting the fact that volatility is a companion of our investment journey, it helps us to remain focused on our long-term goals.
In fact, volatility helps us with buying & selling opportunities. However, one thing should be clear — we are investing in a good set of quality stocks rather than speculative ones. Generally, high-quality stocks have the tendency to outperform the broad market in the long term.
In today’s market context, the point of volatility has high relevance, as the economy is trading at high risk. The world economy is under the double whammy gloom of recession and rising interest rates. The plausibility of earnings growth is diluting during which the valuation should trade below the long-term average. However, the P/E ratio of India is up by 15 per cent above the long-term average.
India’s stock market earnings yield is at five per cent compared to the low risk and high return of 7.25 per cent provided by the 10-year govt treasury. High-quality corporates are providing a coupon of 7.4 per cent to 11.9 per cent for AAA to A- bonds. The bond yield is expected to increase further due to the hawkish monetary policy. This is making debt an attractive investment proposition with negligent risk compared to the high-risk equity market.
It makes sense to have a balanced portfolio with a mix of equity, bonds and gold. A risk-averse investor can have 40 to 60 per cent in equity based on risk appetite. Gold can be picked with a mix of 5 to 10 per cent. In the case of equities, it is better to be stock and sector-specific.
The Indian economy is resilient compared to the world economy as the domestic market is expected to de-couple. However, it will have a ripple effect, so the focus should be on domestic-oriented companies like consumption and finance, which are attractive too, given reasonable valuation.
Sectors/stocks which are expanding capacities in line with the domestic reforms will be able to outpace. Sectors such as capital goods (electrical), green energy, EVs, sugar, textiles, chemicals, and electronic manufacturing have decent outlook. Opportunities are also emerging in sectors like IT & Pharma due to moderation in valuation, though volatility is expected in the short-term due to the recession in the US & European regions.
First published in Economic Times