Use the current low valuations to buy large-cap stocks

Last Updated: Mon, Jul 01, 2013 05:03 hrs

Year 2013 started on a positive note for Indian equities. Market analysis and research pointed to a possible bull run, with increased liquidity and supportive valuations. The reasons for such a positive outlook were many - long-awaited government reform, foreign direct investment in retailing and low interest rates, among others. But six months later, the situation has changed.

Ironically, while the projected upswing at the start of the year was attributed to domestic factors, the current downswing is a cumulation of several global factors directly affecting market performance. The current bear run in the Indian equity markets is range-bound and dependent on several global cues, which have, in turn, been somewhat positive, but largely negative in nature.

Notable global cues, such as easing of the cash crunch in China or the rise in the German consumer index, have contributed to a positive bias in the current scenario. However, the recent announcement by the US Federal Reserve of the gradual withdrawal of the quantitative easing stimulus, provided the US markets stabilises and unemployment data looks up, has pulled global markets downward.

What the announcement meant was the US economy is showing positive signs of recovery and, hence, might not need government aid for too long. However, the news impacted all emerging markets, such as India and Brazil, as after the announcement, foreign institutional investors (FIIs) started consolidating their positions, resulting in a massive sell-off that has impacted liquidity in the equity landscape. With the withdrawal likely to start over the next few months, global markets have turned distinctly weak and India has been no exception. With FIIs turning net sellers over the past few days, the move has dented market sentiment. FII flows have been further impacted by the falling rupee, given global cues, weak trade deficit numbers and lacklustre corporate earnings performance.

But is there a silver lining to all these?

Actually, yes. Historical data shows the Indian markets have been extremely resilient to global cues and domestic factors, including political instability and recession, among others. And have, on average, offered better return on investment. The current downtrend has made stocks extremely attractive for long-term investors. The good news is the Indian growth story still holds promise and value in the long term and we do see FII flows returning to India soon. The falling rupee has also boosted corporate earning of some sectors and the impact of that will be seen in the medium to long term.

All in all, while in the short term the markets will continue being uncertain with more expected corrections until there is clarity and strengthening of global cues, the medium to long-term outlook is extremely positive since stock prices have corrected very significantly making these lucrative for investors who would buy quality stocks and hold till market recovery.

Our recommendation: Use this time to do some research and buy specific stocks, especially large-caps or blue-chips at corrected prices and hold these for a period of one to two years to receive good return on investment and create wealth.

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