How to Prepare for Recession & Make the Most of this Bullish Market

Ever since the auspicious festival of Holi, celebrated in March 2023 this year, one of my close friends has transitioned into a holiday mode.

He now has enough money to embark on luxurious vacations and his pictures in breath-taking locales made me wonder – did he win a lottery or a good bet on a Horse Jockey?

Sure enough, I asked him whether he had hit the jackpot.

His response? - This is all thanks to my remarkably profitable trades in the Indian stock market. You may have encountered similar stories in your inner circle.

Look at the tables below to see the markets' performance over different periods.

Source: NSE, BSE, Kotak Securities

And here’s how some of the Sensex darlings have performed:

Source: BSE, Kotak Securities

Let’s not get into a lot of data, but how did the midcap and smallcap do? Well, over the above three periods, the gainers have surely outweighed the losers.

The top five gainers in the smallcap space (on a year-to-date basis) have delivered three digit returns, while the top five midcap stocks have given over 50% returns during the same period. That’s sweet!

Reasons Behind the Rally

There have been instances where the market continued to go up as it was flush with liquidity.

Considering the FOMO factor, retail investors usually bet aggressively directly or indirectly **(via mutual funds) ** when they get hints of a bull market. It’s the same thing this time around.

SIP inflows are at a record high, and Demat account opening have doubled in a matter of just five years.

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But SIPs and demat account opening is not the only reason why the Indian market is rising. It seems multiple tailwinds have come together simultaneously, driving the growth.

Along with domestic participation, foreign institutional investors (FIIs) have also started to take exposure to India. They have been net-buyers in the last few months.

Then come the profits, which have largely stayed in line with the estimates. Here’s a WhatsApp forward I received the other day that shows how the profits of listed companies have improved in recent years

Source: CMIE

This is encouraging! And then we have the macro-economic data, which tells that the Indian economy grew faster than expected in FY23.

With all these euphoria, it makes sense to ask…

Where’s the Market Headed?

An important question on investor’s mind can be – How higher can the market go from here? Well, data points suggest a further upside. But remember that markets don't go up in a straight line. There are always periodic corrections to contend with. Notable investor Seth Klarman has put it aptly:

You must always be prepared for the unexpected, including sudden, sharp downward market and economy swings. Whatever adverse scenario you can contemplate, reality can be far worse.

So, while the market euphoria is exhilarating, the path to further upside in the next couple of years won’t be a straight line. Coming to global markets, what’s the biggest issue there? Is it inflation or recession? Well, why not both?

The U.S. needs to avoid a recession which seems unlikely. Fed Chair Jerome Powell recently warned that rate cuts are far off on the horizon and corporate America might feel some pressure in the coming months. Furthermore, earlier this month, the World Bank lowered the global growth outlook and warned that high inflation, rising interest rates, and Russia’s invasion of Ukraine still pose headwinds that skew risks to the global economic outlook.

These data points highlight the concerns many people in the industry have.

To be fair, the current situation is complex, and it hasn’t happened before. Lower global GDP growth, relatively strong employment, solid consumer spending, and asset prices falling or rising aggressively. Which begs the question…

How Can One Navigate This Market Volatility?

Here’s what we’d like to highlight about future price movements - making predictions is complex, and no one can predict the market’s direction with 100% accuracy. And that’s where diversification comes in handy. It plays a crucial role in mitigating risk. And it ensures investors can exploit potential opportunities while also safeguarding their investments.

An easy way to diversify your portfolio is to divide it into different parts with different asset classes and allocate fund allocations to them as per your financial planning.

Investors comfortable with having a higher risk-reward ratio can have a higher allocation for stocks.

Check out our top stock screeners by clicking here.

If stocks are not the first choice, and you prefer safety over returns, you could look at gold.

The investment options here can be physical gold, gold ETFs or the lucrative sovereign gold bonds (SGBs) which generates market linked returns as well as a 2.5% per annum interest. Know more on SGBs here.

There’s a reason why the standard 60/40 or the 50/50 ratio portfolio between equities and bonds/fixed deposits/gold has stood the test of time.

Only time will tell if the next couple of months play out how the market participants anticipate.

But until then, remember to trade and invest wisely, with time-tested strategies, and proper risk management measures in place.