Markets constantly surprise us and remind us that even the best investors can find it challenging to accurately forecast short-term market movements. Much like the year so far, the month of May has also been anomalous in terms of equity market behaviours. Stock markets in India and globally defied the old adage, ‘Sell in May and go Away’ to notch up significant gains during the month. The market move has been particularly confounding considering the prevailing economic environment and the near-term uncertainty around economic recovery as well as a resurgence of the virus.
As we enter into June, there are a host of factors that market participants can evaluate to position themselves for the month.
In the current environment, investors have an opportunity to invest in quality companies that are better positioned to weather the coming economic storm and are available at compelling valuations. Investors can look for quality mid-cap or small-cap companies that have the potential to garner decent market share and a strong balance sheet with high cash/minimal debt. However, investors must understand that this strategy will accrue benefits only in the long-term. In the short-term, markets will remain volatile and equity participation should be minimal and limited to large caps. Since the current rally is not really standing on fundamental legs, it is highly likely that a small blow could dislodge the entire up-move. Investors should try to avoid getting trapped and take investment decisions cautiously.