How to win in a bear market

Markets are down 20% from their peak. Learn how to make the most of this bear phase

Though there will be short to medium term pain, a bear mar ket is also an opportunity for long-term investors. A look at the previous eight-year cycles shows that there have been real bull markets and fake bull markets. While the bull market till 1992 generated compounded annual returns of 37%, the next eight years generated a paltry 4% a year. Similarly, the bull market till 2008 generated 17% CAGR, but the next bull market till 2015 that took the Sensex to 30,000 plus levels generated only 5% CAGR. Experts feel the next bull market is going to be a big one. “Somewhere during the stress, the next bull market will start and the next leg is going to be very powerful,“ says Mehraboon Irani, Principal & Head (PCG), Nirmal Bang Securities.However, this is not the time to buy because the bottom formation of the next bull market is going to take time. “Don’t expect a V shaped recovery . The recovery will be U shaped, that too with an extended bottom,“ says Kunj Bansal, Executive Director & CIO, Centrum Capital.Historically, the broader market valuation also comes down significantly before the next bull phase starts. The Sensex PE has fallen to its 20-year average (see chart) so there is scope for a further decline.BE SELECTIVE IN STOCK PICKS

Investors should not buy a stock just because it has fallen too much. Experts say investors should maintain a portfolio of good quality stocks. “Start accumulating stocks where results are looking strong or where the Government policy impetus is likely to drive growth,“ says Dipen Shah, Senior VP & Head of Private Client Group Research, Kotak Securities. On his radar are large-cap IT stocks and select road construction companies.

SWITCH TO LARGE-CAPS

Until recently , mid-cap stocks were zooming. This was because foreign investors, who mostly invest in frontline stocks, were selling these as part of a broader emerging market strategy. Meanwhile, domestic mutual funds, armed with continuing inflows from local investors to mid-cap schemes, were pumping money into a basket of mid-cap stocks. Traditionally, large-cap stocks trade at premium to mid-caps, but mid-cap valuation went above large cap in the recent past.

Though the recent carnage in midcaps has brought their valuation below large-caps, experts reckon that the largecap universe still offers a good investing opportunity . Feroze Azeez, Deputy CEO, Private Wealth Management at Anand Rathi Financial Services, says further buying into mid-caps is not advisable. “I strongly advocate investors stick to largecap stocks as the risk-reward payoff is skewed toward this segment.“ Vikas Gupta, Executive VP, Traded Markets, Arthveda Fund Management, also feels large-caps are the place to be as these are significantly undervalued relative to mid-caps. His suggestion is cash-rich large-cap IT stocks.

MF investors should also go with large-cap funds. But those holding midcap oriented funds should remain invested rather than switching to a different category . “Mid-cap stocks do tend to be more volatile. But if you invested in this category on the premise that India’s recovery is likely to play out over a 3-5 year period, there is no reason to change your mind,“ says Arun Gopalan, VPResearch, Systematix Shares & Stocks.

BE READY FOR SECTOR ROTATION

The top performing sectors change in every bull market. It was banks and com modities that led the 1992 and 2008 ral lies. The FMCG, pharma and IT sectors were running the show in 2000 and 2015 Investors should look at beaten down sectors and enter when prices reach rea sonable levels. Leave commodities alone for now. However, PSU banks are a good option. “The price to book ratio of some PSU banks has fallen 0.3-0.4 times. Inves tors with a 1-2 year horizon can consider buying them,“ says Ajay Bagga, Execu tive Chairman, OPC Asset Solutions.

INSURE YOUR PORTFOLIO

Since the market is expected to be vola tile in 2016, investors need to insure their portfolios. Investors with large and well diversified portfolios should consider hedging their portfolio with Nifty out-of-the-money put options to protect their existing holdings from erosion. A similar strategy is possible for investors who are planning to get in at current levels. Even if you identify a very good stock, experts advise against jumping in without protection.

DYNAMIC ALLOCATION APPROACH

Investors also need to manage their portfolio more dynamically . Small investors may not have the time or the ability to do this. Their best option are schemes that follow a dynamic asset allocation. They have a higher allocation to debt when markets are at highs and get into equities when markets are undervalued. Due to its lower volatility, this category is best suited for risk averse investors. “These funds are structured to invest in equities when markets are cheap and book profits when markets are rising“, says Nimesh Shah, MD and CEO, ICICI Prudential AMC.

BE A DISCIPLINED INVESTOR

All strategies need active participation.Small investors who are not able to do so should continue with SIPs to make the most out of the upcoming market volatility. Experts insist that the right approach at this time is to maintain one’s asset allocation. It helps you average out purchase price over a period of time while capturing more units when prices are low and less when prices are high. When the market bounces back, the units bought at lower levels provide a huge boost to the overall return.