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What can Investors do during this Market Fall?

The recent fall in the market has worried investors. But what are the reasons behind this fall? Let’s Find out…

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(A) Global Economy

When Covid-19 Pandemic hit, every government in the world turned on the money tap. They spent heavily to stimulate their economies during the lockdowns.

The Central banks flooded the world with newly printed money. It increased the purchasing power of the people.

Inflation occurs when people have excess money but the supply of goods are same.

How does printing money cause inflation and result in a Market fall?

If banks print more money and the number of goods doesn’t change. Households will have more cash and more money to spend on goods. If there is more money chasing the same amount of goods, firms will just increase their prices.

But now Governments are winding up their covid economic support programs. Central banks have stopped printing money. In fact, the US Fed will soon reverse the process by withdrawing the funds it pumped in. Therefore, now there will be a liquidity crunch in the economy. Thus people will invest less in the stock market and many will even try to sell the stocks.

(B) Geopolitical Risks

The Russia-Ukraine war has caused disruption in commodity markets, especially crude oil, and certain metals. The sanctions imposed on Russia will also have consequences around the world.

Russia and Ukraine hold a significant share of the global commodities trade. Russia supplies 10% of the global nickel. Together with Ukraine, it accounts for 29% of the global wheat exports. Some other commodities they supply extensively include palladium, natural gas and corn. Due to which the commodities sector touched record highs recently.

(C) Effects on India

(i) Inflation

The Rising prices of commodities, especially food and oil prices have caused much hardship.

Market fall- Retail Inflation By IMF

The worry in the market is that retail investors, who are driving the market, may choose to cut back on spending. When inflation is high, people's saving reduce and no one wants to hold on to a stock that is not rising or worse, falling which leads to heavy selling.

Market fall- India GDP forecast for FY23

Rating agencies have lowered the GDP forecast for India due to inflationary pressures, supply-chain pressures, and geopolitical tensions due to Russia’s invasion of Ukraine.

Selling by FIIs:

Foreign Institutional Investors (FII) is among the big movers and shakers of the stock market. Since April 2021, FIIs have sold worth over $20 billion shares.

They still held close to $620 billion as of 31 March 2022. But the selling has been relentless. In January 2022, they sold $4.46 billion worth of shares. In February 2022, they sold $ 4.71 billion worth of shares. Further in March they sold $5.38 billion which result in market fall.

They have been selling Indian stocks for many months now. Retail investors made up for this selling with their enthusiastic buying. But the selling by FIIs meant that retail investors were the only larger buyers in the market.

Market fall- FIIs & DIIs Monthly Investment in India

With the decrease in holding of FIIs from Indian market their is continuously increase in retail and Indian intuitional holding in the market.

Rising Interest Rates:

Interest rates have started rising all around the world. In the recent RBI Monetary Policy dated 8th June 2022, the Reserve Bank of India raised its repo rate by 50 basis points to 4.90%.

The market went down in anticipation even before the announcement and crashed after it. But the reason for the crash is much deeper than a rate hike.

Market fall-US government Bond 10 years yield

The yield of the 10-year US government bond is the global benchmark for long-term interest rates. It is negatively correlated with the global stock markets. 

As this rate goes up, the value of stocks declines. This leads to heavy selling in the market. The 10-year US bond yield has risen from 0.5% in August 2020 to about 3.33% at present.

In India, the 10-year government bond yield has increased from 6.8% in July 2020 to 7.4% now.

(D) What to do during the Market fall?

(i) Stay Invested:

The history of financial markets, not just in India but also globally, is full of share market crashes. After every crash, the market is revived, and profits are yours again. The key is to stay invested through the low phase and wait for the markets to pick up again.

(ii) Be greedy when others are fearful

Falling stock prices can mean many things, such as the company’s fundamentals being on a decline or market sentiment being poor.

However, investors can buy good quality stocks and Mutual Funds below average purchase prices during a bearish trend. While others are fearful to invest, it is the right time to buy. This can provide unique opportunities to buy undervalued stocks and earn significant gains.

So this is good time to accumulate good stocks and mutual funds.

(iii) Thorough Research

It is always important to research the fundamentals of stocks, mutual funds, or any other investment avenue in which you are looking to invest in. But when the market is in a particularly bearish trend, this research becomes paramount. Once you have narrowed down your choice of stock, it is wise to spend an ample amount of time and effort going over its management, business outlook, and overall financial performance.

Doing thorough research along with fundamental analysis can reveal new opportunities in companies. A professional research team can help you for this.

(iv) Value your Margin of Safety:

Investors who value reducing their market risks place great importance on the concept of Margin of Safety. The Margin of Safety is essentially the difference between a share’s market price and the investor’s estimation of its actual, intrinsic value.

You can set your Margin of Safety based on your risk appetite accordingly. In particular, the Margin of Safety can serve as the point of difference between one stock and another during a falling market. It can offer you certain ease of mind to know that you are maintaining a comfortable Margin of Safety for your investments even during a bearish trend.

(v) Be Patient and Follow Your Instinct:

During a bear market, the prices of stocks may fall sharply, and investors can panic and sell their shares to further cut their losses. For instance, your friends and relatives might be panic-selling and encouraging you to do the same. However, keep in mind that every investment portfolio is different.

Instead, stay patient and keep a keen eye on the fundamentals of your investments and act as required. If you plan to hold your investments over the long term, it might be more prudent to hold onto them until the downtrend subsides. It is a common principle that good stocks often come out of a bearish market in the long run, and being patient can ensure you stay profitable in the long term.

(vi) Consult your Financial advisor:

For new investors, understanding the dynamics of the investment market can be challenging and time-consuming. In such a situation, one can consult an expert financial planner while making critical financial decisions relating to investments and returns.

The professional financial advisor works in the best interest of the investor and puts their time and effort to manage your portfolio. They have extensive knowledge of the different types of funds and have different investment strategies. Their expertise and functional abilities can be advantageous for your portfolio management.

(E) Conclusion

Bear market might appear disappointing to investors but can be turned into a great opportunity. As an investor, it is best to tread with caution and ensure that you are prepared to meet the unpredictability and volatility of bearish trend. Moreover, it is more important to take the advantage of this situation.

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References: News Publications, Research reports, Inflation reports, GDP data, Money Control,

Disclaimer: The report only represents personal opinions and views of the author. Thus, the report & references mentioned are only for the information of the readers about the industry stated.

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