Invest On Dips To Beat Market Volatility

Rakesh Goyal
Senior Vice President
Bonanza Portfolio

• CORPORATE SCORECARD
  Corporate earnings for the September quarter would be the driving factor in the coming months. If the earnings are above expectations, the market is likely to ignore other economic concerns for some more time.

• TACKLING VOLATILITY
  Considering the current market scenario, one should invest in good companies on every dip, which will average out the market volatility risk.

The Indian markets are trading in sync with their global peers. Recent action by the government on the much-awaited reforms front, coupled with the stimulus announcement from the US Fed, has definitely boosted the market sentiment.

The indices have seen a spectacular rally in the last two weeks, touching their 14-month high levels. However, with the Indian stock markets trading near the P/E ratio levels of 15 and above, the valuations seem to be expensive at the current levels in comparison with those of other emerging markets. The P/E ratio for the emerging markets, particularly those of Korea and Indonesia, is near 25x. So, in the near future, we expect India to underperform the other emerging markets. Also, in comparison with the other markets, India has seen a sharp decline in P/E levels since 2011, and this trend was not seen in other emerging markets during the same period.

Not to forget, India’s GDP continues to be near its three-year low levels at below 5.5 per cent, and policy stagnation and the lack of structural reforms also remains a concern despite a recent spurt seen in government action. Hence, we believe that investor sentiment has been strengthening globally and liquidity is also driving the markets upwards. The Nifty may look up to a target of 5850-5900 for the remaining part of FY13. However, slowing growth concerns may result in a pullback.

The government has been continuously working to control high inflation. However, the recent rise in fuel price, among other factors, is likely to pump up inflation in the coming months. Considering the same, interest rates may see a marginal 50 basis points reduction in the mid-term. However, things have changed quite a bit on the ground over the last few weeks, and the government is looking committed to push the reforms through and keep fiscal deficit under control. It is also focussing on reduction of subsidies where necessary. Moreover, FIIs have shown continuing interest in India. They have invested around Rs 74000 crore in the last one year and Rs 13400 crore in September 2012 alone. This shows their continued confidence in India’s broad economic policies and growth story.

The rupee has become relatively strong from Rs 57 to a US dollar in June 2012 to touch the Rs 53 levels in September 2012. This may continue for the next few weeks, and it may appreciate to the Rs 51-52 levels in the next three to four months. If exports to the Euro zone countries pick up and demand from the US continues, the rupee could appreciate reasonably well. However, much would depend on inflation, crude oil price, etc., which may affect our trade deficit. The recent body language of the government is very positive, which augurs well for the appreciation of the Indian rupee with the global situation remaining more stable.

The Shome committee has proposed abolition of short term capital gains, increasing STT and deferring GAAR. All this will impact the market direction in the near term. Corporate earnings for the September quarter would be a major driving factor in the coming months. If the earnings are above expectations, the market is likely to ignore other economic concerns for some more time.

FMCG and pharma stocks have corrected and can be considered for fresh buying at the current levels. Private banks have rallied strongly, and should be considered for buying on dips. The power sector is yet to outshine, and is reasonably valued at the current levels. It has remained underinvested, and the supply side lags the demand substantially. Our picks from these sectors are ITC, Hindustan Unilever, Cipla, Lupin, Power Grid Corporation, Tata Power, ICICI Bank, HDFC Bank and IndusInd Bank.

Investors should believe in core fundamentals and consider companies with a strong management and consistent and sustainable earnings for investment. Proper discipline should be maintained while selecting the right stocks and right time to enter the stock market. Considering the current market scenario, one should invest in good companies on every dip, which will average out the market volatility risk.