Contrarian Investing Is For All Seasons!

The market is finally showing signs of weakness after a one-way movement from the time it hit the lows in March 2020. This correction in stock prices will create opportunities for investors. However, the question is about which strategy will work best in the current market situation. Will contrarian investing approach suit in the current market conditions? Yogesh Supekar explains why contrarian investing approach is for all seasons and how it works

- Yogesh Supekar

The benchmark index Sensex has fallen by about 8 per cent from its all-time high levels. This fall has been across merely 27 trading sessions. Thus, a sudden change in trend has taken several bulls by surprise even though, to be fair, a correction was expected by market participants. It is the depth of the correction and the speed that has surprised a few. What is interesting to note is the performance of the private banks. BSE Private Banks index is now the worst performing sectoral index and is down by more than 13 per cent in the past one month. Banks have indeed underperformed the markets even though PSU Banks has shown relative strength when compared to private peers.

In the recent fall we have seen that metal stocks too have tumbled along with those of private banks. The BSE Metal index is down by more than 10 per cent in the past one month. Interestingly, even real estate and energy stocks have been a part of this correction. If we look at the performance on YTD basis it is the metal stocks, power-sector related stocks and real estate stocks that have outperformed the markets handsomely. The broader markets have been able to give confidence to investors as the BSE Small-Cap index has fallen by less than 2 per cent while BSE Sensex is down by about 7 per cent in the past one month. The broader market outperformance is remarkable in the current fall.

The change in market trend is always a testing time for longterm investors. The extent of market correction is not easily estimated and more often than not investors have no clue as to how long any such correction may last. The price and time correction can frustrate even the best of investors. In such difficult times when market volatility is unnerving and valuations are stretched, what investing strategy can work best? What if we apply the principles of contrarian investing in the current times when the valuations are stretched and market participation is at a record pace?