Look out for opportunities
10/10/2011 5:50 PM Monday
RAJIV DEEP BAJAJ - Vice Chairman & Managing Director
The European sovereign debt crisis and the deteriorating growth outlook for developed markets, coupled with high commodity prices, are stirring fears of a worldwide ‘Stagflation’. In the domestic economy, high inflation, the RBI’s continued rate hikes despite slowing growth and policy inaction are threatening to throw the economy into a protracted slowdown. Further escalation in the problems faced by Europe and USA can lead to even higher risk aversion, thereby impacting capital flows into India.
Rising commodity prices can aggravate domestic inflation, as India is a net importer of commodities. The actual problem with the European crisis is that just like during the Lehman episode, no one knows who holds how much debt of countries like Greece. This is a maze where one can get lost easily.
A default by any of the European economies can lead to a renewed bout of risk aversion. The impact of this will be visible more on the financial markets than on the real economy. Indian equity markets still remain highly vulnerable to FII flows. The average daily trading volumes in the Cash segment, at around Rs 13000-14000 crore, are not enough to absorb the net selling of Rs 1300-1400 crore in a single day from the FIIs. The sharp fall in the INR/USD rate only exacerbates matters.
The markets seem to be polarised in terms of valuations at present. There are two sets of stocks available – on one hand are sectors related to the consumption theme trading at average PE multiples north of 30, whereas, on the other are sectors such as metals, oil and gas, infrastructure, etc., trading at average PE multiples south of 10-12. However, this disparity cannot continue for long, and should correct itself over time. Mid and Small-Cap stocks in sectors like capital goods, engineering, civil construction, IT, cement and PSU banks seem attractive from a purely valuation perspective.
The possible triggers that one should look for in the near term include a fall in commodity prices, mainly crude oil, and the government finally acting on the much needed, yet delayed policy reforms. For retail investors, it is very easy to fall prey to the volatility in markets and emanating news flows and switch to cash or gold. However, history shows that this is the worst thing to do. Money was not made when market sentiments were bullish. Rather, money was made when the chips were down. While there are numerous headwinds for the markets today, the valuations suggest that most of them, if not all, are priced in.
My advice for retail investors is that they should start six months’ to one year SIPs in proven diversified equity funds in these markets, with a clear cut investment horizon of three years or more. Moreover, this is not the time to lock in funds by investing in bank deposits or FMPs. An excellent opportunity might just be round the corner for those who have the guts to wait for it and the eye to spot it.
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