The carnage in the Indian markets on Monday has surely made many brave hearts tremble. And why not?
The Bombay Stock Exchange's benchmark index, the Sensex, fell 7.41 per cent or by 1408.35 points while the S&P CNX Nifty was down 8.7 per cent or 496.50 points compared with their respective closes on Friday. This follows last week's 8.7 per cent and 7.98 per cent decline in the two indices, respectively.
This bloodbath, however, provides investors with yet another opportunity to buy quality stocks at cheap valuations. And many experts buy this argument.
"Such panic selling provides long-term investors with an avenue for deployment of long-term savings in quality stocks," said Ved Prakash Chaturvedi, managing director, Tata Mutual Fund. "I think the correction was partly on account of higher valuations. The markets now seem to have bottomed out and trading at reasonable valuations. One can use this correction and accumulate value stocks," said Jigar Shah, head of research, KIM ENG, a Singapore-based FII.
While the consensus seems to be emerging in favour of selective buying, the reasons are not very different either - the India growth story and fundamentals continue to remain intact. And, thanks to this correction, the excesses in the market, to a large extent, also stand corrected. But some concerns do exist.
I V Subramaniam, chief investment officer, Quantum Advisors added, "Looking forward, the fundamentals of Indian corporates still look good. However, from the point of view of international money flow, a lot of global issues still exist which would impact the near-term fund flow into India. This, in turn, will keep the markets volatile."
In this scenario, what is the outlook for the market, one would think. The answers are a bit tricky, especially if one has a short-term perspective. However, the overall picture is not that bad.
Said Sandeep Sabharwal, CIO, JM Financial Mutual Fund, "The market looks pretty good in terms of opportunities."
"The risk to reward ratio is in favour of investing. One can expect a 4 to 5 per cent downside while 20 to 25 per cent in terms of returns."
Deepak Jasani, head of retail research, HDFC Securities, said, "We may not go below Monday's low and I expect trading to bounce back over the next 8-10 days. After that, there is a possibility of the markets again running into some road block."
Sabharwal said, "Investors should focus on companies with strong cash flows. There is value across the board but there are specific sectors which offer more value. The sectors I like, include IT (large companies are available at 12-13 times FY09 earnings and have strong cash flows). Construction and auto, which did not perform in the rally, look even more attractive after the current fall." He, however, feels that infrastructure and power utility stocks look expensive.
On the other hand, Ambaressh Baliga, Vice-President of Karvy Stock Broking believes that there are many mid-caps that are back to attractive levels.
Besides that, he says, "We are still avoiding realty and telecom, and power to some extent where we still see them to be overvalued as compared with market valuations. Other than that, we are investing across sectors like IT, pharma, capital goods, infrastructure."
To sum up, despite short-term volatility, experts suggest that investors can derive returns of about 25-30 per cent from current levels by prudently picking stocks.
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