The market does not like uncertainty. And the war in Ukraine has done a lot for this. This caused unprecedented volatility in the Indian stock market.
The Nifty fell nearly 7%.
However, things have changed since then. The stock market made a strong comeback. Although Nifty hasn’t made any new highs till the last week of March 2022, it has been extremely resilient.
In fact, few commodity stocks like Hindalco and ONGC have given positive returns this year.
This raises a question: What do we learn from this episode in the market?
There are parts of the answer. Let’s have a look at them one by one…
#No one can predict the market
There was talk of a bear market when the war started.
Many so-called market ‘experts’ thought that a protracted war along with massive sanctions on Russia would disrupt commodity markets. This in turn will send inflation to a higher level which will affect consumption across the globe.
lower consumption This would mean less revenue for the companies. Lower revenues coupled with rising costs will lead to a sharp drop in profits. The market would have to pay the price and such low stock prices were to be expected. At least that was the prediction.
Well, a lot of his predictions came true, except the ones that mattered. There has been a substantial recovery after a slight fall in share prices.
This has happened despite the continuation of the war, major sanctions imposed on Russia, disruption in commodity markets, crude oil rising above US$100 and high inflation.
At the same time, the US Fed began its rate hike cycle, letting everyone know that it is now solely focused on fighting inflation.
There are also other concerns such as a realignment in geopolitics, rising tensions in the Middle East, a rapid escalation in North Korea and a new coronavirus outbreak in China that is spreading across the world.
When the war started, no one predicted that the market would recover so quickly.
Still did.
We should stop this.
An important lesson we can learn as investors is this: no one can tell you how the market will move. Don’t listen to someone who says they can predict the market.
# If the market falls, the stock can go up
In the first week of March, the Nifty was down 14% from its all-time high. A drop of more than 20% would be called a bear market.
In such a scenario, it was natural to assume that most, if not all, stocks would be down.
And this assumption was true to a large extent. Many stocks, especially midcaps and smallcaps, fell by more than 50 per cent.
But this was not universally true.
There are stocks that are up more than 10% this year, though market sentiment has been mostly bearish.
In fact some stocks like Hindalco are up more than 20% in 2022. Others are flat. Still others are only marginally down.
Then there are the stocks of some sectors which have performed very well. Chinese stocks come to mind.
Balrampur Chini and Triveni Engineering are up 30% and 45% this year. These are staggering gains in a falling market.
What is the lesson here?
In any bearish phase there will always be pockets of bullishness. These stocks can be very profitable. You must look for them.
# Long term trends
Whatever the short term, this war will have long-term effects.
Here are some of them…
The high level of inflation will continue for some time, possibly even beyond 2022.
Shortage of supply of various items will become a regular occurrence. Every country has to be ready for this.
The era of low interest rates that began during the 2008 global financial crisis is over. Interest rates will increase further in the coming years.
some areas – Defense AI, 5G, Fintech, Internet of Things – will do well. Consumption-dependent sectors may struggle.
# The most obvious long-term winners may be defense stocks
Defense stocks may not have set the market on fire recently, but they are strong candidates for long-term wealth creation.
The government’s push for self-reliance will be a massive tailwind for these stocks. Several defense-related companies are likely to emerge in the next few years. These businesses will cater to new ideas that the market may not even be aware of.
The long-term prospects of this sector are bright. But choosing the right stock will be a challenge.
Disclaimer: This article is for informational purposes only. This is not a stock recommendation and should not be treated as such.
Note: Equitymaster.com is currently unavailable due to technical reasons. We are sorry for the inconvenience caused. In the meantime, please access our content at livemint.com, you can also track us youtube And wire,
(This article is syndicated from Equitymaster.com)