Equity Investment: Honey from bears

In the last 90 trading sessions,the Sensex has closed positive only 42 times and investors are looking for alternative investment options. Foreign institutional investors (FIIs),who invested a record $29 billion last year in Indian equities,have turned net sellers in 2011. FIIs have pulled out Rs 5,524 crore from the stock market year-to-date because of better returns from developed markets,especially the US.

Though retail investors are getting out of the markets,historical data show that markets in the past have risen from a bear phase on the back of strong fundamentals. Given the past performance,the current valuations are perfect for cherry picking at a bargain. For new investors,it will be a tough time and they should look at the fundamentals of companies.

Angel Broking chairman and managing director Dinesh Thakkar says the current corrections in the markets are factoring a slowdown in the economic growth on back of high inflationary pressures.

“However,given the Indian economy has a potential to grow at 8% per annum,resulting in 15-16% corporate earnings,the Indian markets can sustain a 14xPE multiplies. At the current juncture the Indian markets are trading at 14x FY2012 estimated earnings. Thus,from a fundamental perspective the downside risk is limited and retail investors should start investing in the markets at regular intervals.”

In a volatile market,disciplined investing is the only way and it is ideal to go for incremental investment instead of putting a major chunk of money in a particular stock or a sector. Analysts say one can look at reshuffling the portfolio to get rid of the underperforming scrips and buying those with medium-term potential. Buying defensive stocks such as pharmaceuticals,fast-moving consumer durables and selling aggressive stocks such as real estate,auto and banks can help minimise the losses.

Thakkar advises that after the recent correction in the markets,many sectors are available at attractive valuations.

“The sectors that are attractively valued and provide good returns at this juncture are banking and infrastructure. Also with the world economy on the recovery path,we believe that the midcap IT sector,which trades at huge discount to the largecap peers,provides a good investment opportunity. Also select opportunities are available in pharmaceuticals and capital goods,” he says.

For those who do not want to enter the markets directly,systematic investment plans (SIPs) of mutual funds which work on the rupee cost averaging are a good option. When markets go down,fixed SIP installments buy more units and vice versa. When the markets dip it makes more sense to invest via SIPs because you are buying small amounts continuously,which means costs will average out over a period of time.

So,over a period exceeding three years,your chances of making a profit are much higher compared to a one-time investment. As investments are made at different points of time and at different net asset values,the purchase price of units average out.

IDBI Asset Management managing director and chief executive officer Krishnamurthy Vijayan says there are three rules for systematic investment.

“First,it must be for a long time and must therefore over a few market cycles. Starting an SIP in January and then re-visiting that decision in 12-18 months’ time is like digging up the roots to see if a plant is growing,” he underlines.

The government’s Central Statistical Organisation has projected a GDP growth of 8.6% for the current fiscal,as against 8% in the last fiscal and as the GDP elasticity to corporate earnings in India is around 1.25%,corporate earnings are expected to be in the range of 15% which bodes well for retail investors. Though a lot of clarity on the medium-term movement of the markets will emerge only after the Budget,analysts suggest it is not the right time to sell and especially panic selling.