Overview:
The stock markets all over the world were trading at their highest peaks between December 2019 and January 2020. As Corona pandemic hit, the whole world came to a halt. Because of the lockdowns, around 40% of the small businesses may close forever.
In India, the MSMEs (Micro Small and Medium Enterprises) make 30% of the GDP employing more than 28% of the work force. Their contribution to our economy is unparalleled. As per expectations, the GDP might slump by 5% for the FY21 in India.
The situation is no better in the Western countries with unemployment touching 15% in the US and 8% in the European countries. When it is so clear that the whole global economy might not revive for years, how come the stock markets are on the rise? The valuations does not seem to be right, and Bull Run will end soon. If that’s the case, there is a good chance of stock markets making new bottoms from thereon. We can take advantage from the crash in the stock market.
How can we take advantage of the stock market crash?
The Indian Nifty 50 index was trading at P/E of 28 and P/B of 3.6 in January. When the Nifty slumped to 7590 levels, it reached the P/E of 20 and P/B of 2.6. You can find my article on fundamentals.
There is a good opportunity in sectors like automobiles, pharma, oil, and FMCG, etc. You can find the stocks in these sectors with healthy fundamentals and financials at a low premium. There is a very slender chance of finding Pharma and FMCG stocks at low premiums in these pandemics and financially depressing situations.
Stay away from stocks of companies related to Cinemas, Amusement Parks, Airlines, Hotels, and Tourism. These are the worst affected sectors due to Corona. Do not be fooled by the low premiums. Investing in these stocks might be similar to catching a falling knife.
Performance of top 10 companies during the fall:
In these chaotic times, even the good companies are available at a good discount. Let us check the stock prices of the top 10 NIFTY companies pre and post-market crash on 23rd March.
| COMPANY | Highest Price in January 2020 (₹) | Lowest Price in March 2020 (₹) |
| RELIANCE | 1580 | 870 |
| HDFC BANK | 1290 | 740 |
| HDFC | 2495 | 1505 |
| INFOSYS | 780 | 510 |
| ICICI BANK | 545 | 270 |
| TCS | 2255 | 1515 |
| ITC | 245 | 140 |
| KOTAK BANK | 1710 | 1050 |
| HINDUSTAN UNILEVER | 2070 | 1830 |
| BHARTI AIRTEL | 540 | 400 |
All the stock prices fell drastically. After the 23rd March crash, the markets started rebounding gaining 25% in the last two months. Nifty closed at 9580 levels as of 29/05/20. Most of these stocks have gained 30% or more since the crash. Reliance share has almost doubled in the second week of this May.
Most of the retail investors who got panicked and sold off these stocks at low prices in March have faced enormous losses. Some intelligent investors would have bought these stocks when the prices fell. They are sitting with handsome profits now. It is their choice to sell off at 30% profits or accumulating more when the prices fall once again.
ETF and Index Funds
Some people are afraid to get into stock markets. They can benefit from buying the Index funds. Basically, Index funds invest in Nifty companies. The fund managers put the money accordingly based on the weightage of companies in the Nifty. There are also Exchange Traded Funds (ETFs) that are similar to Index funds, but these are traded in the stock markets. Only users with Demat accounts can buy ETFs. Similar to common stocks, both ETF and Index funds will be available at a discount during the crash.
What about Small Caps?
Inexperienced investors should distance themselves away from the small-cap stocks, especially, in these turbulent times. Operators make use of these stocks to trap the retail investors. If you have done your research and are confident of the business thriving the corona scare, you can invest. Make sure to start your investment after the release of this quarter (Q1 of FY21) results.
Small caps do provide exceptional results in the long term if purchased at a reasonable price. There are instances where small and mid-cap companies made 100 times the initial investment in 10 to 20 years.
Do Public Sector Enterprises stocks make a good investment?
Most of the high-quality PSU stocks are trading at the abysmal prices. For instance, ONGC has dropped from 170/- to 82/- in less than one year. Generally, people prefer PSUs for the high dividend yields. Under these situations with a depressing economy, we can’t expect the companies to pay high dividends.
But if you are a long term investor who is willing to wait for 3 years or more, you won’t be disappointed. There is a very good chance of the prices doubling in between two to three years.
Nifty performance after the 2008 crash:
Nifty 50 dropped from 6300 in Jan 2009 to 2290, crashing by 65%. But raised to 6300 in the next two years gaining around 151%. The investors who invested at the 2008 bottom would have doubled their money in two years.
There is a beautiful saying by Warren Buffet, “Be fearful when others are greedy and greedy when others are fearful.” Stock Markets are most risky trading at their peaks and least risky at their lows. People who get the grasp of this simple logic take advantage of a stock market crash and make fortunes.
Note:
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID: shivakumar.lachapeta@valueinvesting.online.
