Stock markets: What to look for?

As the Indian markets yo-yo madly, they seem to be making even the savviest of investors rethink their investment strategies.

However, despite all their ills, the declines that we have witnessed in the month of May (see graph below) have once again presented investors with an opportunity to buy into stocks.

The reason for these falls are many -- political uncertainty, firm oil prices, the likely rise in the US interest rates and terrorism.

As these uncertainties continue to haunt the stock markets, beginning Black Monday (May 17), we had asked our audience what their decisions would be with regards to investing in these volatile times.

And not to our surprise, a majority (51%) polled that they would be buyers in these times. On the other hand, while 39% voted for the 'Hold' option, only a small 10% polled that they would be happy with cash in their hands.

Our view

We have reiterated that in these cases, when the markets are at their highest levels of volatility, a staggered and a long-term strategy is most likely to be successful in providing investors with adequate returns on their investment.

Also, at these times, Benjamin Graham's parable of 'Mr Market' stands in good stead. This is, probably, one of the best metaphors ever created for explaining how stocks can become mispriced.

What Graham tells investors through this parable of 'Mr Market' is that they should make these fluctuations as their friend rather then their enemy. This means that they should neither give in to temptations that rising markets bring with them nor should they think of doom when the markets are falling incessantly.

Whatever the experts may say, we suggest investors to utilise this weakness to their advantage and build a long-term concentrated portfolio of stocks.

If one feels that the volatility is too high, then it is advisable to invest in a staggered manner (directly or through a mutual fund). But the common question is, which stock to invest?

1. Look beyond divestment. There are fundamentally sound companies in the PSU sector as well from a long-term perspective. Yes, there is uncertainty over the rise in crude prices and the impact on the same on profits, if petroleum product prices are not raised. But for how long? Rationality will prevail at the end (be it the government or the investing public).
   
2. Services contributes to 50 per cent of India's GDP. Will Indian software and pharma major be affected because of the new government? Are these companies hiring at a slower rate? The answer is No. Having said that, we believe that these sectors being portrayed as 'defensives' by experts is overplayed. But yes, the fundamental story is intact.
   
3. There could be some impact on consumer demand for durables and cars if interest rates were to rise (which is expected). So, one has to exercise caution in sectors like automobiles and related sectors.
   
4. Yes, there will be impact on the infrastructure related companies (power, engineering and cement) if the new government repeals some bills that are already passed.
   
5. But the new government has been constantly talking about providing a fillip to the agricultural sector (70% of the population and 25 per cent of the country's GDP). Are investors overlooking this sector?

The point we are trying to make is that stock markets always take time to reward performance. Keep in mind that stock prices tend to follow the long-term profit growth prospects of any company. It is just a matter of looking beyond who is selling and why is he selling?

Equitymaster.com is one of India's premier finance portals. The web site offers a user-friendly portfolio tracker, a weekly buy/sell recommendation service and research reports on India's top companies.