Invest on declines

The indications during the last couple of months are that, the situation is indeed unlikely to get any worse, and if anything may even improve. The government, with its back to the wall, and facing the threat of a ratings downgrade is finally back on track of reforms says Deepak Mohoni, Director, trendwatchindia.com

2013, so far, has not been a particularly good year for Indian equities. This is despite the Sensex having come within 3.5 per cent of its  all time high of 20325, which it reached over five years ago in January 2008.  

The sensex itself has gained 5.8 per cent on a year-to-date basis (on October 15) which gives it a lowly 34th rank from among 51 important global indices considered for a study. Further, barely one in five of the BSE-500 stocks have provided positive returns during the year, despite the Sensex trading in a positive territory.

News flows on the economic front have not been very good either, with the rupee losing over 10 per cent of its value during the year, GDP growth estimates continually being revised downwards, the Current Account Deficit looking threatening, inflation running high, as also interest rates. Besides, the stock market is now highly dependent on FII inflows, and these could turn on a coin and become outflows should the US start its "taper".

These factors have naturally dampened investor sentiment considerably, and made investors look at assets other than equities for their savings. However, it is exactly at times like these that the best investment opportunities arise, and the rest of this article explains why.

The most important aspect of the market to bear in mind is that the index is akin to a thermometer, and reflects all the positive and negative factors that are currently present. This means, if the situation is not expected to get any worse, this is about as low as the index would get. 

The indications during the last couple of months are that, the situation is indeed unlikely to get any worse, and if anything may even improve. The government, with its back to the wall, and facing the threat of a ratings downgrade is finally back on track of reforms. The new RBI governor has also promised dramatic reforms in the banking sector, and this could kick-start the economy. The global economy too has been showing slow signs of improvement. The threat of a "taper" has also receded, and we are not likely to hear of it until well after the new Fed Chairperson takes over in April 2014.

In other words, this is the right time to take some risk and start investing in equities. That however, brings up the question of when to buy? The Sensex has not been static during the year, but has been making large swings between 17900 and 20650 (closing prices) throughout 2013. This represents a band which is 15 per cent each side of the average of the range. 

So, the lower half of the range - around 19000 or below, could be seen as a good area to buy stocks. This holds good as long as the corrections continue to be as heavy as they have been this year. An alternate method which does not require waiting for levels, would be to simply invest incrementally whenever the index has declined for about two weeks from any recent intermediate peak.

The next decision is about which stocks to buy, and which ones to avoid. With interest rates running high it will take a long time for companies with a high debt to recover and start giving good returns. This, rules out sectors like real estate and infrastructure immediately. Note that while these are not good investment stocks, they remain interesting for shorter-term traders, because of their high volatility.

As mentioned earlier, only about one in five of the BSE-500 stocks has provided positive returns so far in 2013. From this minority, stocks will either be going sideways like the Sensex, or would be in long-term uptrends. The few stocks in uptrends are moving up independent of the market, and at the moment are the safest options, even though they may appear to be a little overvalued. It is too early yet to look for "turnaround" stories.

The best performing nifty stocks have been from the pharmaceutical and IT sectors, including HCL Technologies, TCS, Sun Pharma, Lupin, Infosys and Dr Reddy's Labs. Stocks from other sectors that have either outperformed the indices or have most likely bottomed out include Tata Motors, ITC, Asian Paints, HDFC Bank and HDFC. 

These dozen stocks can thus be considered to be a starter or core stocks of a portfolio, and more can be added later as the economy improves. Follow simple investment principles of not investing all your money at once, but incrementally whenever the opportunity arises. And, of course, invest on declines.