Should You Try Bottom Fishing in the Stock Market?

The rupee has hit an all-time low of 77.465 against the US Dollar. The Russia-Ukraine crisis has pushed up crude oil prices beyond $100 per barrel. India, which imports over 80% of its energy needs, feels the pinch as domestic petrol, diesel and LPG prices shoot up. Another main factor behind the crashing rupee is the worldwide surge of the US Dollar. The US Federal Reserve hiked interest rates in the US by 50 basis points in May to control surging US inflation. Moreover, the rise in US treasury Yields has increased the strength of the US Dollar as investors across the world rush towards the haven. As Foreign Portfolio Investors (FPIs) exit the Indian stock market, should you try Bottom Fishing?

What is Bottom Fishing in stocks?

Bottom Fishing is an investment approach where investors look for stocks considered undervalued. For instance, investors look for stocks whose price has dropped significantly, thereby available at a discounted price. Moreover, investors expect the stock prices to rise once the market recovers. 

Bottom Fishing is an attractive investment strategy to earn quick profits during volatile stock markets. However, it can be a risky approach even for seasoned investors as you have to account for all factors that impact stock prices. 

For example, you will have to determine if the stock price of a company has crashed because of investor behaviour or a change in the company’s fundamentals. 

Why are Indian stock markets crashing?

In the first week of May, FPIs pulled out over Rs 7,700 crore from the Indian stock markets. Moreover, FPI outflow from equities hit Rs 17,144 crore in April and over Rs 41,000 crore in March 2022. The main reason for this is the impact of high crude oil prices on the Indian economy. 

Moreover, the weakening of the rupee against the US Dollar has raised fears of higher import costs. As India imports a lot of crude oil, domestic inflation could spike in the coming months. It would result in a widening trade deficit impacting the balance of payments. 

Foreign Portfolio Investors will liquidate their Indian stock holding and shift investments to US fixed income securities as the dollar strengthens. Moreover, the aggressive tightening of US interest rates, lockdown in China and the continuing Russia-Ukraine war could keep Indian stock markets depressed. 

Should you try Bottom Fishing in the stock market?

You may be tempted to pick stocks after the recent stock market correction. However, you must pick stocks of companies with solid fundamentals. Otherwise, you will suffer heavy losses if the stock market corrects further. 

If you are a novice investor who has just started investing in stocks, then it is better to sit out the bear market rather than lose money. You must understand a bear market before you indulge in Bottom Fishing. For instance, bear markets can drain your portfolio, and the stocks you consider undervalued today may become dirt cheap tomorrow. 

A bear market can stretch for several months. Moreover, many stocks can lose around 50% of their value in a bear market, and the mid-cap and small-cap stocks could crash heavily. It pays to wait for a few months before indulging in Bottom Fishing as the market could be highly volatile. It would help if you kept cash ready to indulge in Bottom Fishing and buy quality stocks every time the market corrects significantly. 

A stock market correction is a good time for long term investors to invest in quality stocks. Moreover, the US Federal Reserve and the RBI could continue to raise interest rates in a calibrated manner for the next 12 months to control inflation. It will give you opportunities to indulge in Bottom Fishing as stock markets correct. However, if you are not confident with bottom fishing, it helps to focus on buying quality stocks in tranches without waiting for the market to bottom out.

For any clarifications/feedback on the topic, please contact the writer at cleyon.dsouza@cleartax.in