In principle, most investors Know that volatility and correction are a part of the game in equities. But, when there is a meaningful improvement, many of them forget this knowledge. They become nervous, anxious and even timid. In that case investors worry about the unintended rather than focusing on the useful and profitable aspects. In this short note we explain the key lessons learned from past market corrections and subsequent recovery.

improvements are normal

It is important to note that meaningful corrections are quite common in equities. Market, In the last 15 years we have seen six instances of Nifty falling at least 15%. The sharpest correction was from January 2008 to October 2008 when Nifty fell 60%. The shallowest was from August 2018 to October 2018, when Nifty fell by 15%. The longest correction lasted from November 2010 to December 2011. The smallest improvement was from February 2020 to March 2020.

While generalised, these improvements differed from each other in terms of duration, extent and causal factors. It is almost impossible to predict the exact beginning and end of the correction phase. Unfortunately, many investors spend a lot of time and energy figuring out when the correction phase will end. This often leads to frustration and anxiety.

stock spread Return

Most of the discussion about stock markets mainly focuses on the behavior of indices like Sensex or Nifty. While this fascination about indices is understandable, the real play in the market is about spreads. shares and sector returns. If you analyze the past data for any given year, you will find that there was a significant difference in the performance of top performing stocks and bottom performing stocks. This is true whether it is a positive, negative or a flat year for the indices. In 2021, the NSE500 was up 30.2%, but the average return of the top 25 stocks was positive 244% while the average return of the bottom 25 stocks was negative 33%. In 2018, the NSE500 was down 3.4%, but the average return of the top 25 stocks was a positive 49% and the average return of the bottom 25 stocks was a negative 68%.

most important lesson
Instead of worrying about unintentional factors, we strongly advocate that investors think about more practical and actionable aspects during the recovery phase. An important lesson is that after the market bottoms out at the end of the correction phase, the index has very healthy returns for the next 12 months. In addition, there is a leadership change in regional performance before and after the reform phase. Sectors that outperform the broader market after exiting the bottom of the market are often very different from those that outperformed before that correction phase began. The table shows how leadership changes.

what should investors do
Since improvements are an inherent part of equity marketWe urge investors not to worry. Furthermore, since it is impossible to predict the duration and extent of the correction phase, it is best to use systematic Investment the vision. In fact, since the 12-month return after the end of the correction is very good, investors should consider increasing it. equity Allotment during the correction phase. Also, when new sectors emerge as leaders in the post-reform phase, investors should ensure they are in the right position by investing in strategies that help capitalize on leadership changes to outperform the broader market. We do.

Author: Chief Investment Officer, Girik Capital