The market has been trading with volatility amid multiple headwinds, making investors jittery and clueless in the current scenario. The domestic equity market continues to trade range-bound without any decisive breakout amid geopolitical tensions, rate tightening by central banks and relentless FIIs selling. As on May 26, the market has closed in the red on 13 occasions and settled positively on the other side only on five times of the total 18 trading sessions this month.  

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We spoke to Sunil Damania, Chief Investment Officer, MarketsMojo, to understand current trends in the market. A chartered Accountant with 30 years of rich experience tracking the Indian and Global stock markets, Damania spoke on a range of topics related to the market, including market outlook, how to protect portfolio and trading ideas among others. Excerpts...

How can investors protect their portfolio in a falling market? 

In the last few months, the market has been volatile due to geopolitical situations, supply-side constraints, and changes in the Central Bank's policy actions to curb surging inflation. 

Some of the factors mentioned above are transient in nature, apart from inflation, which we think will remain sticky. So, in our opinion, the following 3-4 months could see a choppy ride. But despite the short-term ups and downs, we believe in having a long-term commitment to equity. However, we do not advocate the BUY and HOLD strategy at the stock level. 

We have observed that many good quality companies did not create any alpha on the portfolio holding over a long period despite the overall market moving up. 

We suggest a slightly long-term view on equity without worrying about short-term volatility. 

However, it is important to note that the sectors/companies driving the next rally will not be the ones that drove the previous rally. 

The market continues to trade range bound and has dipped 4-5% in the last one month. Where do we see it heading by 2022 end? 

The market would likely remain choppy for the next 3-4 months. But once it moves past that, the market will stabilize with an upward bias. As a result, we expect a 7-8% gain in the Nifty and Sensex over the 2021-closing by the year-end. We also sense that Nifty would be in the region of 18700 and Sensex at 62500 by the year-end -- approximately 15% gain from the present level. 

Primary market has been abuzz with IPOs lately, including LIC IPO that saw a tepid debut. Last year has been a landmark year in terms of record capital generated from public issues. How is this year positioned in terms of IPOs? 

Several IPO companies have tapped the market with aggressive pricing, but they have not left enough for retail investors. Almost half of the IPOs tapped the market in the last nine months have quoted below the offer price. Given this kind of poor performance, investors have been left bereft of confidence. 

The past year was good for IPOs, where more than Rs 1.30 lakh crore money was raised. However, we expect this year to be subdued. Historically, after every good IPO year, the IPO market tends to go soft in the following year. A similar trend was observed in 2013-14 and 2017-18, which were good years for IPOs but had modest collections in the subsequent years. 

What should investors do in the current market? How to choose the right fund? Is there any specific category of MF that an investor should focus on amid high volatility? 

We recommend investing in direct equities over mutual fund investments. One of the main reasons is that most active funds have underperformed the benchmark over a longer period. For instance, according to the latest SPIVA study, more than 82% of large-cap funds underperformed the benchmark for a period of five years. 

We have also seen that the best-performing scheme for one year underperforms the following year. Moreover, with recent corporate governance issues surfacing in mutual funds, AMCs do not offer much confidence to investors. Therefore, if all investors want to invest in mutual funds, we recommend Index ETF funds over active mutual funds. 

The market continues to be shaky in view of multiple domestic and geopolitical headwinds. How would the rate tightening by Central Banks across the globe, including RBI, further affect the domestic equity market? 

Not too long ago, we had correctly predicted a rate hike. Now, as we advance, we believe that inflation will remain sticky. We also think there is a high probability that the Fed may do a rate hike of 75-basis points instead of a 50-basis points rate hike. 

As far as the RBI is concerned, we believe that one can expect at least 75-basis points (over and above 40-basis points rate hike) in the next six months. While interest rate hike does impact sentiments temporarily, there is no correlation between the rate hike and the downward equity market. 

If our economic factors are relatively strong, then interest rates alone will not be able to impact market sentiments adversely. 

With Nasdaq and S&P 500 correcting nearly 25% and around 15% from their peaks, how real is the global recession? Is the US economy heading towards recession in 2023? 

There is a 75% probability that the US economy may move into recession. Given the scenario, we believe India would be among the best-performing economies among the larger economies. A slump in the US is likely to attract FIIs' money to the Indian equity market that has been constant sellers in the Indian market in the last few months. 

The Indian market has outperformed the US market in FY2022, and we believe that even in FY2023, the Indian equity market will surpass the US market. 

Some trading ideas to tide volatility in this market and sectors where investors can explore opportunities in falling market? 

We use a long-term fundamentals and technical factors to arrive at stock recommendations. We follow a bottom-up approach. Our big-data analysis suggests that small caps should do better than mid-caps, and midcap will do better than large caps.  

Therefore, we recommend focusing more on small caps. Our top picks in small caps are Rajratan Global and L G Balakrishnan. 

(Disclaimer: The views/suggestions/advice expressed here in this article are solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision)