‘Midcap stocks good buys for investors’

Stock markets corrected by whopping 14.13% from Diwali,but buying opportunities remain.

Indian markets have corrected by whopping 14.13% from Diwali till date on various issues starting with corruption,scams,bribes,inflation,rake hike worry,consequential slow down and finally flight of capital to developed markets. Historically, the valuations have corrected and there are many midcap stocks that are quoting at 5 to 10 PE ratio which is at least 50% discount to the Sensex PE and 75% discount to many Sensex component companies. This makes a good case of investment for long-term investors going forward in mid cap stocks than Sensex component stocks and investors will do well to pick stocks for long term. The valuations today are below the multi year averages which make Indian equities safe destinations though the current volatility is adding a lot of pain.

Generally,this kind of correction is seen as beginning of long term correction or bear market. Many may even toss up an idea saying the GDP growth may falter to 4% or below and hence the correction is justified and there is further downside and estimate of downside differ from person to person. However,I am not inclined to accept this because in my opinion,the mother of the Bull market is commodity especially oil and gold which are still in the long term bull run. There is no concept on fundamentals short term bear phase and long term bull phase. If so,this is called correction.

Typically,even the 2008 slowdown was also a deep correction for 15 months which was similar to the 15-month rally of 1992 and 2001. Bourses follow commodity markets as the demand and supply depends on it. On going capex across sectors is proof of continuity of bull market. The bull run in commodities will be on till 2015 to 2016 and hence there is no way I can conclude that we have entered bear market.

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The India growth story is intact and lucrative considering its peers globally which are either plagued with degrowth or economic destability. World over,India and China are the only two safe options for investors where they can look ahead for wealth generation. Infrastructure,power,banking,consumer durables,natural gas,metal,education,fertiliser, agriculture,capital goods and dredging are a few sectors where investors can enter. Investors should avoid IT and auto.

India has seen a scam in equities in 1992 and 2001 and consequential crash of stock markets but every time India has come back strongly due to its inherent strength. The Indian population has become a blessing in disguise and emerged as greatest domestic consumers in Asia. In fact,many developed countries are looking at this population to bail them out as far as their economy is concerned.

What is missing here as compared to other countries is the attention to the people of this biggest democracy. Around 80% of our population is living on daily wage of Rs 20 a day yet we have left with 20% population which is educated and if cultivated can use their savings for the purpose of investment in the capital market. For that,we need to bring down the multi-level influence on the capital market. We need strong reforms where influence of some quarter such as foreign institutional investors gets diminished and the markets find domestic equalisers.

It is disheartening to note that the volume of Rs 1.6 lakh crore makes us the second best exchange in the world but it does not provide an exit route to Rs 1,000 crore selling on a given day. Ours is the only market in the world where there is no physical settlement. In fact,223 listed companies have market capitalisation of Rs 58 lakh crore and 30 Sensex companies have a market capitalisation of Rs 27 lakh crore. In the long run,we need to have the self belief that India is one of the best in terms of growth and will offer good investment opportunities.

* The writer is CMD,CNI Research