Indian stock markets are currently in a state of flux. Domestic growth is slowing and earnings growth has not been up to the mark. NBFCs have been facing liquidity problems. On top of that, the global trade war is a reality, China is slowing down and oil prices have spiked sharply. That brings us to the million-dollar question; should you focus your online trading strategy on the short term or the long term? Should you focus on making the best of the volatility or should you focus on building your long term quality portfolio. You must focus on 3 separate segments with a different approach for each segment.
Short term F&O driven strategy to capitalize on volatility
Medium term strategy based on the next 1-year outlook
Long term strategy that combines your financial plan with value bargains
a) Short term F&O driven strategy
The idea of this strategy is to capitalize on the short term trends in the market. For example, a sharp spike in oil prices (as we saw this week) is negative for oil marketing companies, paints companies and automobiles. You can trade these stocks via futures or options. For example, you can ride the oil price spike by either selling futures or buying put options on OMCs and auto stocks.
For example: Another trend in the last few months is a sharp rise in the price of gold. Now, how do you play gold through equities? You can play gold through jewellery stocks due to better value of gold inventory. You can also play these trends through gold financing companies. Gold prices normally tend to spike when uncertainty spikes. For short term, you may not bet on the direction of stocks but just focus on relative outperformance.
b) Medium term strategy for the next one year
This is the medium term approach with a time frame of one year or so. What do you cover in this strategy? Firstly, you focus on stocks that have corrected more than they deserved. For example, the consumption weakness led to many frontline FMCG stocks correcting sharply. They could be good medium term buying ideas. Similarly, the problem in NBFCs and HFCs is restricted to companies with a maturity mismatch. But, in the process, many quality NBFCs without maturity mismatch have also corrected sharply. This gives an opportunity for medium term investors. Thirdly, the government has been specifically encouraging sectors like export-oriented units, low cost housing, auto manufacturers, food product companies etc with GST and other funding sops. These could again be stocks to play in the medium term.
For the medium term, you can also look at some allocation shifts in your strategy. For example, you can focus on gold as an asset class as it is most likely to benefit from uncertainty in the markets. Also, within the gamut of debt mutual funds, credit risk funds look the most vulnerable. As a conscious strategy you can look to shift out of credit risk funds and into income funds for the next one year.
c) Long term strategy for allocation and value picks
This is the most important part of your strategy you need to focus on. Firstly, what about your overall allocation? Remember, market volatility should not make a big difference to your broad allocation. The financial plan is designed with in-built safety checks so that profits get automatically booked at higher levels and value stocks get bought at lower levels. That discipline should be sustained and the allocation should not be tampered just because of the market volatility.
Finally, we come to the more important question of long term bargains. Here, the focus will have to be on mid cap stocks – especially the ones that have managed to hold value even in these tough market conditions. They could present pockets of value. Secondly, there are the blue chips you always wanted to buy but found the stock too expensive. If the volatility gives bargains, it is time to open your shopping baskets.
At the end of the day, it will boil down to breaking down your strategy. You may realize that this volatility is actually a blessing in disguise!