The current dip in the market is not yet a good buying opportunity, so what do I expect in 2022? Further, what SIP and lumpsum investors should do?
If you deploy cash on every dip, you will not have the money to buy when the market offers a more significant drop.
So I believe that the current market correction is not yet a buying opportunity broadly. However, select areas are a great buying opportunity.
First, let me share why the current dip is not yet a buying opportunity and when I think the drop will be a good buying opportunity.
Why is the Current Dip Not a Buying Opportunity?
I don’t like to comment just because I have to share a view. However, I am sharing the opinion based on data, so let me share why the current dip is not yet a buying opportunity.
Every dip is Different.
Every dip is not a buying opportunity because every drop is different.
When FED had been doing quantitative easing, the dips meant the liquidity would push the market higher. Still, FII were sellers.
Now the FED has a view of quantitative tightening. So the liquidity will slowly have to adjust. Once FED starts tightening, the other central bankers will follow. So, liquidity will decrease so the equity market can see some volatility.
Again, I am not saying the equity market will see volatility but can.
So the best approach in the current correction is to wait and watch. The investments can remain as it is, but it is wise not to consider new lumpsum investment right at this moment.
Earnings Growth Is still not Across sectors.
India has been outperforming the world market because there is a high chance that India will see a 20% increase in earnings for the current year.
It was all going as expected, but the results of the September quarter in 2021 saw a massive impact on earnings because of the raw material prices rise.
Sales are growing, but most non-commodity companies see margin contraction. So earnings growth remained on expected lines but nothing spectacular.
The 20% earnings growth that was being priced into the market may not come through.
NIFTY EPS and Book Value are Still High
If we look at the earnings per share or EPS chart for Nifty, the current EPS is around ~740 and PE ratio of 24.
Chart by Trendlyne
Historically, the Nifty PE ratio below 20 has been a great buying opportunity. Even around 21ish PE, it can be a good buying opportunity.
Similarly, the price to book value of Nifty is ~4.5. Hence, a book value of ~4 is a good buying opportunity.
What do I expect in 2022?
There are three possibilities that I think is highly likely in 2022.
1. Market Consolidates for Some Time
Looking at the above chart, one can see an increase in EPS every quarter.
The earnings growth that we see in the EPS of nifty continues, but the market consolidates around the same level for a quarter or two. So it means the PE ratio of Nifty decreases with the increase in earnings.
2. Nifty EPS Grows around 20%
If the market has to run away from here, the earnings growth has to be around 20%.
I say this because there is still a 10% correction left.
Price to earnings or PE ratio of 24 and price to book or PB ratio of 4.5 suggests a 10% correction will become a great buying opportunity.
If there is more than expected earnings growth, the 10% correction may not be needed.
3. More Correction
If the earnings growth is not as the market expects and slows down slightly, the market can adjust to the new reality with more correction.
What Should One be Doing Now?
The bigger question is what one should be doing now?
SIP
The worst-case scenario is that the market can correct further by 10 to 15%.
For SIP investors, it can be a blessing. So this may not be the right time for lumpsum investment, but this is an ideal time to start your SIP investments.
Wait for Further Dips or Time Correction
If you are looking to invest the lump sum amount in mutual funds or ETFs, Ideally, you should opt for SIP or wait for another 5 to 7% correction from here.
Ideally, you can split your total investments into two or three parts and invest them on every 1000 point correction from the current market level of 17k.
Accumulate Growth Companies with Reasonable Valuation
The best approach is to accumulate high growth companies available at reasonable valuations.
I am not saying everything has become cheap, but some pockets in the market offer good value.
I am not recommending any stock, but companies like PI Industries or Abbott India have corrected ~30% from their peak.
Look for companies with a proven track record for the past ten years of high growth and good ROCE and invest in them if they have corrected reasonably from their recent peaks.
Final Thoughts
Correction is always an excellent opportunity to buy, but we always want more correction when the correction is on, and the market may not adhere to what we want.
You have to start buying, but it doesn’t mean you can buy anything and everything. Remember, one should buy in the market based on how well it will rise from here and not on how much it has fallen from the top.
Invest in a long-term India growth story, and you should be fine in the long run.
This is one of the best and most relevant article I have read in the current market conditions.
Glad you liked it.