As the clouds from the South West gather in the skies, it is usually gloomy during the day. There is a flood in India’s North-East while the monsoon is below average in most other places. Financial markets are witnessing an unprecedented level of volatility. As reflected by benchmark indices like the S&P BSE Sensex and Nifty, stock market returns are negative for 2022 and a year. However, stock markets are a function of economic and market cycles. Hence, there will always be hope. That is of the market cycle to turn from the downturn.
As an investor, your priority should be to look at data and information closely. A market downturn is a right time to do so. This column is not about investing more than trading. If you are an investor looking to achieve long-term financial goals, you may want to step back and review the necessary information. There is a lot to process in terms of data coming your way. You need to figure out things that matter to you and your finances.
There are geopolitical headwinds. India cannot escape the turmoil if the world faces rising inflation, supply shocks due to the war in Ukraine and an economic slowdown. Capital flows to India will be affected. India needs foreign direct and portfolio investment to boost economic growth. For the moment, the selloff from foreign investors at every sign of a rally is visible.
For stock markets, there is nothing holier than profits. Share prices follow the growth of profits. It may not happen today or tomorrow. However, share prices incline to toe the line of profits eventually. There is no other reliable metric than profitability. The quarterly financial results announcement by listed companies gives us insight like none other.
The corporate profits to Gross domestic product or GDP ratio are at the highest level in a decade, according to an analysis by Motilal Oswal, a securities firm. The number was calculated for the profit reported by 500 companies in the Nifty 500 index. The ratio fell to the lowest level of 2.2% in 2020 and has since climbed to 4.3%. The ratio has consistently declined each year since 2011 except for 2017. There is an expectation that companies will continue to build on the momentum over the next two years.
The banking and the financial services sector is leading the surge in profitability. The Reserve Bank of India’s monetary policy announcement pins hopes on the banking sector’s strength. Large companies have lesser debt than before, and businesses are expected to plough back profits into expansion. The important aspect about all of that is profit growth of businesses is back on track. From an investment standpoint, you need to follow that line of thought.
Investing and trading
Your finances need to have an adequate cushion of emergency funds. Do not indulge in stock market investing or trading till you have a sufficient emergency fund that takes care of your expenses for at least six months. While investing for the long-term is not a risky business, trading in volatile times without adequate knowledge is dangerous. The worse thing to do could be to take new loans to buy or sell shares. In a rising interest rate scenario, that could be extremely risky.
Those who are sure about their future income can take risks. Those with doubts about jobs or income should steer clear of stock market trading. Investing should continue through systematic investments in mutual funds plans. You could opt for a systematic equity plan to buy a fixed quantity of shares or exchange-traded funds each month. Any company in a growth sector that consistently delivers profits and is a market leader could be that option.
The hope of a recovery in economic growth and profit growth of businesses will drive the value of your investments in the long run.
For markets, nothing holier than profits
Share prices follow the growth of profits. It may not happen today or tomorrow. However, share prices incline to toe the line of profits eventually. There is no other reliable metric than profitability. The quarterly financial results by listed companies gives us insight like none other
(The author is editor-in-chief at www.moneyminute.in)