Use Market Volatility To Invest In Good Stocks At A Lower Price

Equity market outlook was quite upbeat when we entered the year 2015. However, it kept losing the strength as the year progressed. Early part of 2016 has seen acceleration in that negative trend and the investors at large have become nervous due to heightened volatility and sharp fall in the markets.

Before we embark on forecasting the outlook for the rest of the year and beyond, it is imperative that we analyse the factors that have led to decline in equity market.

While our macro-economic factors have witnessed robust improvement, the corporate profitability has been hurt due to sluggish demand conditions, low operating levels and adverse impact of commodity price fall on margins. Downward trajectory in corporate earnings growth and lack of big bang policy initiatives in domestic market have resulted in de-rating of our equity market. Global issues such as slowing Chinese economy, resultant commodity crash and currency market volatility have added to already subdued sentiments in the domestic market. 

On the domestic front, the revival of corporate earnings and passage of key reform bills by the government will be the biggest drivers for markets going forward. Earnings revival is likely to be slow and gradual, but it should happen through some pick-up in demand scenario, improved capacity utilisation, reduction in interest burden, and increased government spending. Passage of key bills such as the bankruptcy code, the GST (goods and services tax) guideline, labour reforms and land acquisition, along with administrative reforms to increase the ease of doing business, will support the market. A pro-growth budget will also bring cheer the market. How the government will balance the need for capex and consumption revival with fiscal prudence to influence economy will be keenly watched.

India has never suffered three successive below-average monsoons. La Nina augurs well for a good monsoon in CY16, which should support the revival of rural economy.

From global perspective, any stability in declining Chinese growth and currency market will augur well for our market. Foreign flows are linked to some of the global issues and hence, our market too will witness volatility until things stabilise, albeit at much lesser degree. Once the dust settles, Indian equities should attract higher incremental share of flows as our market is the highest growth market in the world.

At current valuations of around 14x one-year forward earnings multiple, the market discounts most of the bad news and is trading at the lower end of historical valuation range. The expectations have been reset quite meaningfully and the valuations are quite attractive for a long term investor. The downside in the market at current undemanding valuations looks limited. While the market may continue to test investor patience in the immediate term, the upside could be very significant when the economic and corporate recovery starts to gain momentum.

If the earnings cycle starts to look up, then already strong macro fundamentals will enable the market scale back to earlier peak of 30,000 levels and beyond. From this perspective, investments at current market levels or below are definitely attractive.

Volatility is inherent to equity markets. At the same time, volatility can also be used to advantage by investing in good businesses at lower price points. We advise investors to go through systematic investment route in mutual funds to navigate through ongoing volatility in the equity market and build a long term portfolio for significant wealth creation.