Who will blink first?

twitter-logoDipak Mondaland twitter-logoRahul Oberoi | Print Edition: April 2011

November 5, 2010: The Sensex celebrated Diwali in style by
scaling the 21,000 level and closing at 21,004, its highest ever.

December 31, 2010: The Sensex closed the year at 20,509, down
500 points from its 52-week high.

February 9, 2011: In less than one-and-a-half-months, the
Sensex shed 2,500 points to close at 17,500.

Since February 9, the market has been swaying between the 17,500 and 18,500 levels, keeping experts guessing on its next move. It has been seesawing something like this: 200 points down one day, 350 points up on the next followed by a steep 150 points fall in the very next session. It almost appears to be a zero-sum game, with the Sensex expected to stay in a narrow range for the time being, unless global factors such as the tsunami in Japan have a ripple effect on the index through the global equity markets.

Reports of scams and corruption, high inflation, the Arab crisis continue to spook the market. But they have not been able to force the market to take a definite direction. You, too, like most, must be wondering, which way the benchmark index is heading.

Well, if you are an investor waiting on the fringes for the dust to settle on the bourses, it's likely, as ever, you may end up missing the bus when the markets finally set out on a northward excursion. The concerns on issues of corruption may continue to outweigh the bits-and-pieces of positive news that keep trickling in, in the form of policy changes and, at times, good corporate performance, but if you are a long-term investor, this could well be the time to take a position in the market, irrespective of the short-term volatility.

"We believe that in the long term, GDP (gross domestic product) growth of 8.5% is quite possible, and this should lead to good corporate performance. We are also strong believers that in the long term markets are slaves of corporate earnings," says Chandresh Nigam, head of investment, Axis Mutual Fund.

According to a recent Morgan Stanley Research report, India's medium-term growth story remains strong. "We expect India to be back on a higher growth path of 8.5-9% from 2012-13 onwards driven by demographics, reforms and globalisation," says the report.

The Union Budget for 2011-12 has allayed concerns that the reform process has got stalled, by making the right noises. "The Budget has made several commitments on various economic reforms such as the Banking Law Amendment Bill and liberalising the insurance policy. Going forward, there would be several proactive measures on furthering economic reforms, which would mitigate the volatility arising from the current situation in West Asia," says G Chokkalingam, executive director and chief investment officer (CIO), Centrum Wealth Management.

Nonetheless, the alarmist drum-beating by doomsayers always attracts a larger audience with retail investors panicking the most-which is understandable considering they are the least equipped to absorb the shock of a market crash. The mantra, however, is to stop thinking for the short term and, if possible, filter out the noises of doom.


Before we explore the opportunities for investors in the current market scenario, let us delve into the immediate threats that they face.

Inflation Woes: The Reserve Bank of India (RBI) has been struggling to strike a balance between checking the runaway inflation-by increasing its benchmark interest rates-and protecting economic growth. Despite this, inflation as measured by the Wholesale Price Index stayed above 8% for January, well above the RBI's March-end target of 7%.

12% is the fall in the Sensex between November 5, 2010-the day it broke all its previous records to close above 21,000-and March 10, 2011.
Oil Spike: As the Libyan crisis refuses to recede, global crude price has crossed $110 a barrel and was ruling just above that level- despite a more than 2% fall witnessed after the crisis in Japan - on March 16, 2011. This has not only fuelled fears of a further rise in inflation-India imports 75% of the total crude it consumes-it has added to the uncertainty about India's growth.
Sunder Subramanian, senior manager, institutional sales, Sharekhan, says the markets willremain subdued till crude cools off. Syed Sagheer, equity fund manager, IDBI Asset Management, agrees, "Rise in oil prices is the single biggest concern for the market as sustained high prices would widen the fiscal deficit and impact earnings of many corporates."

FIIs on the Run: With scams and graft cases ruling newspaper headlines, FIIs have been apprehensive about the Indian market. Inflation and rising crude prices have also played a role in scaring them away. FIIs sold shares worth over Rs 5,500 crore in the first two months of the current calendar year (See Institutional Inflows).

Market experts, however, feel that FIIs would take a positive view of the Indian market in the long term. Sameer Kamdar, chief executive officer at ASK Investment Managers says, "FII investments will continue to remain volatile and unpredictable in the short term. In the long term though, India continues to be among the top emerging market economies with a steady and high growth rate. Considering all this, FIIs should continue to chase Indian stocks for a long time to come."

In such a scenario, should you be worried? You should be, because with rising inflation the real return (return on your investments adjusted for inflation) from your investments- especially those in fixed income instruments-are shrinking. This makes it all the more important for you to allocate a part of your savings to investment instruments that beat inflation by a decent margin-and the best option available to make this happen is to invest in equities for the long term, ignoring short-term volatility.


KN Sivasubramanian chief investment officer, Franklin Equity- India, Franklin Templeton Investments, says, "Investors should remain focused on their long-term goals and asset allocation, and keep in mind inflation and real returns." If you are wondering why we keep harping on long-term investments, the following analysis will answer your question.

Equity markets rarely see a secular bull run over a long period. Every northward move is followed by a downward correction. Even during the longest bull-run ever witnessed by Indian equity markets, between January 2004 and January 2008, there have been periods, though short-lived, of sharp market corrections

The Sensex dropped from 12,612 to 8,929 or 29% between May 10, 2006 and June 14, 2006. Again the index shed close to 2,000 points (from 14,404 to 12,415) between February 19, 2007 and March 5, 2007 (See Sensex Swings).

These sharp corrections aside, the Sensex rose from 9,390 in January 2006 to 20,286 at the end of 2007, a jump of 116% in two years. So, are you missing the woods for the trees by paying too much attention to market crashes? The cardinal rule is-and most experts would vouch for it-that over the long-term, investment in equities are not as risky as it seems.

Mahesh Patil, head of equity, Birla Sun Life Mutual Fund, says, retail investors should not be driven by daily movements of the indices. "Though the markets are not out of woods yet, the comforting factor is that valuations are looking quite fair at present," he says.

"Though the equity markets are not out of the woods yet, valuations are looking quite fair at present."
Head of Equity, Birla Sun Life Mutual Fund
If you read our report on multibagger stocks. you will know that some stocks have given more than 1000% returns in the last six years, a period that witnessed one of the biggest market crashes in 2008-09 following the global financial crisis.


Since November 5, 2010, when the Sensex ended at 21,004, it's all-time closing high, it has shed over 2,500 points or 12% till March 10, 2011. The price-to-earning ratio, or PE ratio-an indicator of how expensive a particular stock is-of the Sensex dropped from 24 to 19.91 during that period and the PE of the Nifty shed 13%, from 25.59 to 21.

While some may consider these ratios to be high-PE of over 20 generally indicates expensive valuation- if you expand your universe of stocks to the BSE-500, you may be able to spot many good stocks at cheap valuations. The BSE-500 index was trading at the PE ratio of 18.29 as on March 10, 2011, down from 23 on November 5, 2010.

Gaurav Doshi, vice-president, equity specialist for Portfolio Management Services (PMS), Morgan Stanley Private Wealth Management, says "Given the price erosion that has already taken place, we believe, at current levels, it is time to turn constructive on investments in Indian equities with a long-term outlook."

Prakash Diwan, head of institutional sales at Networth Stock Broking says, "In the next couple of years, the current levels of the market may end up proving to be the best buying opportunity available to retail investors."


Though volatile equity markets should not scare you, it is always advisable to be highly selective while choosing your stocks.

Play safe: Go for stocks of companies with strong financial and operational credentials. Companies with large market capitalisation (an indication of the size of a company arrived at by multiplying the current stock price with the number of outstanding shares) have the capacity to withstand short-term market volatility and economic shocks because of their strong financials and business value. Avoid mid-cap and small-cap stocks of companies with dubious managements or financials.

"The advice to retail investors would be to use the bad days in the markets to invest in high quality companies with sound managements and lot of free cash," says, Vikas Khemani, executive vicepresident and head, institutional equities, Edelweiss Securities. Money Today asked stock analyst to pick their favourite scrips considering the short-term market volatility and long-term growth prospects (See our story Budget Stocks on Page 24). Most of the experts showed faith in large-cap stocks such as Infosys, Axis Bank, BHEL, ITC, Tata Motors, M&M, L&T and SBI.

"Large-cap stocks like Larsen and Toubro, BHEL, Reliance, NTPC are safe and have a greater capability of absorbing inflationary pressures," says Tushar Agarwal, chief executive officer at AGROY Group.

Value Picks: Use the market volatility to pick good growth and value stocks which have been hammered substantially and are available at cheaper valuations.

Growth stock companies are those whose revenues and earnings are growing faster than the industry in which they operate. Such companies usually do not pay dividends, and instead use the funds to invest in expansion. A value stock, on the other hand, is available at a price lower than what it should command given its fundamentals. Such companies pay high dividends and have a low PE ratio. (See Benjamin Graham's 6 criteria for identifying value stock)

Invest systematically: Investors who are too scared to take a plunge in the equity markets directly may opt for large-cap and index funds through the systematic investment route. While mutual funds provide diversification, systematic investment helps in averaging out the volatility factor.

"In the next couple of years, the current levels may prove to be the best buying opportunity available."
PRAKASH DIWAN, Head, Institutional Sales, Networth Stock Broking
"Systematic investing remains an ideal strategy, as it offers an easy as well as effective way to participate in equity markets, reducing the impact of volatility," says Sivasubramanian of Franklin Templeton Investments.

Even in the case of direct equity investments, one should avoid making a large one-time allocation. Investors should, instead, invest a smaller sum each time the market dips and valuations look attractive.


While selecting the right stock is important, in a volatile market, taking the correct sectoral position also becomes significant. Considering the prevailing macroeconomic situation, market conditions and the recent Budget announcements, the following sectors should appeal to you.

Infrastructure: The Union Budget's focus on infrastructure comes as a big boost to the sector. The government plans to increase the outlay for the sector substantially and raise the investment limit for FIIs in corporate bonds. These measures will help enhance the fund flow to the sector. Besides, continuous underperformance for over three years makes infrastructure stocks lucrative at current levels. The CNX Infrastructure index has moved up by just 14% in the last three years beginning March 2008 and has been sliding since December last year (See Sectoral Indices).

FMCG and Pharmaceuticals: Both are categorised as defensive sectors and are not affected too much by inflation or the interest rate hikes. This makes these stocks less prone to market volatility. Also, the Budget's focus on rural incomes comes as positive for the consumption-driven FMCG sector.

"The government's continued focus on boosting rural incomes, education sector and infrastructure augurs well for consumer-oriented as well as infrastructure sectors," says Sivasubramanian.

Rate-sensitive stocks: High inflation and the increase in interest rates may keep the sentiments for banking, real estate and auto negative. However, many experts believe these stocks especially the banking sector stocks have already lost a lot of value and are now available at decent valuations.

"If I were an investor, I would not stay away from rate-sensitive stocks because they have corrected a lot. Any positive news related to the sectors can give a push to stock prices from the present levels," says Raj Bhatt, vice-chairman and chief executive at Elara Capital Plc.

The Union Budget was also positive for both the auto and banking sectors. While the government announced a Rs 6000-crore proposal to recapitalise PSU banks during 2011-12, its decision not to raise excise duties on passenger cars buoyed spirits of auto majors. But the real estate sector had no such luck and many experts are still unanimous in asking investors to stay clear of realty stocks. In a directionless market, the strategy for retail investors would be to stay focused on their investment objectives without getting carried away by incoherent noises. If possible, stop looking at your equity portfolio on a daily basis. For serious investors, inactivity pays in the long run.

As Warren Buffett says, "Much success (in the equity market) can be attributed to inactivity. Most investors can't resist the temptation to constantly buy and sell."

It's Bull v/s Bear on the stock markets
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4.'Firms with good management deliver well on bourses'
5.Invest in stocks with sound fundamentals
6.Pick the best IPO to invest in
7.Check grades before investing in IPOs
8.'Look beyond grading when investing in firms'
9.8 Deadly Sins of Investing
10.'Widespread investment by people will lift the market'
11.Expected mixed response to MII report: Bimal Jalan

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