Accumulate Quality Stocks Now

Jayant Manglik
President – Retail Distribution
Religare Securities 

Where We Are Today

• Due to the uncertainty, volatility is a feature common in bourses across the globe. Key issues for the Indian markets during FY14 will be significant implementation of key reforms, reversal in inflation, easier monetary policy and interest rate cuts.

What To Do Ahead?

• Be cautious and invest in defensive sectors. Following investment basics like having a long-term horizon and diversification can help build a solid portfolio at this time.

Though the Indian markets have been moving in a broad range since the beginning of this calendar year, the last one month has seen a clear downtrend due to various macroeconomic factors. Significantly and unlike earlier times, business confidence too has weakened substantially. All the leading indicators of industrial growth are pointing to a prolonged slowdown. This is further fuelled by weakening domestic demand and declining investments. The only silver lining is a better-than-expected southwest monsoon, which is good for agriculture. The other emerging markets too are in a downward trajectory, including BRICS countries and other emerging market economies.

But it is said that the seeds of a bull market are sown at the deep end of a bear market, and this may well be a good time to look at stocks with sound financials and inexpensive valuations. To spot this, one has to keep a sharp eye on the earnings trends. The first quarter earnings have been mixed. The auto sector fared better than expected, but there are challenges yet. The IT sector is benefitting from demand recovery in the west as well as from a depreciating rupee. The cement, capital goods, construction, metals, realty and power sectors have all posted unremarkable growth. Media, NBFC and energy have largely fared in line with expectations. The persistent fall in the rupee also raises the pressure on the foreign exchange liability of the companies. So, this remains a story that is still unfolding.

The macro-economic fundamentals too have to be keenly watched. Though the WPI inflation numbers have been comfortable for some time now, we expect the headline WPI inflation to inch up closer to six per cent in the months ahead, led by higher primary and fuel inflation. While manufacturing inflation may decline marginally as lower demand restricts price rise of finished goods, primary inflation will increase due to higher food prices. Inflation will remain the most significant challenge ahead, as also its ability to stunt real growth.

Apart from inflation, rising interest rates are a major hurdle to growth, leading to lower export performance and a fall in domestic purchasing power. As soon as the rupee value versus the USD stabilises, the government will surely shift its attention to arresting the rising interest rates.

This situation is affecting the rupee, which has depreciated more than 12 per cent since May 2013 and stands among the worst performing emerging market currencies. The government has already taken action on three fronts, i.e. reducing CAD by discouraging gold imports, steps to increase dollar inflows as well as making the rupee more ‘expensive’ or reducing liquidity in the markets. If these steps work, we are looking at a stronger rupee. If they don’t, Rs 65 to the US dollar is the next stop. As of now, it is too early to take a call as the measures have just been announced. In any case, near-term weakness seems inevitable.

There are a host of triggers that will decide the market trajectory from here on, as there are internal as well as external economic threats. There is a balance of trade problem and the government will have a tough time meeting its fiscal deficit target. The key issues for the Indian markets during FY14 will be significant implementation of key reforms, reversal in inflation, easier monetary policy and interest rate cuts. The US and European markets have been performing much better, and at least the US looks like it is on a comeback trail. But due to the uncertainty, volatility is a feature common in bourses across the globe.

In such a scenario, it is better to be cautious and invest in defensive sectors like FMCG stocks. These may seem expensive on valuations, but are best placed to ride out the current recessionary phase. Britannia and ITC are good representatives of this sector. Likewise, pharma stocks are relatively stable and have a history of holding out during hard times. Here, one can look at Lupin and Sun Pharma. Finally, there is the IT sector, which is reporting good numbers over the resurgence in the west and a depreciating rupee. Tech Mahindra and HCL Tech are counters to watch out for.

Retail investors should also grab the opportunity to use this fall in prices of quality stocks to accumulate via a Systematic Investment Plan. Following investment basics like having a long-term horizon and diversification can help build a solid portfolio at this time. The time is ideal to initiate plans for long-term capital appreciation.

Markets run on fear and greed. Today, when everybody else is fearful, it is the best time to make a measured entry into the stock markets.