As stocks crash, should you take the plunge?

Concerns regarding winding down of the $85-billion-a-month quantitative easing (QE) programme by the US Federal Reserve, or the US Fed, coupled with a weakening currency (rupee) back home has sent the benchmark indices tumbling 6.4 per cent, or 1,301 points, from its 52-week high of 20,444 (S&P BSE Sensex) hit on May 20, 2013.

This three-week slide has seen 367 stocks (98 from BSE 500, including Tata Power, Tata Steel, Tata Communications, HPCL and Bombay Dyeing) hit their respective 52-week lows on Tuesday on the BSE on concerns a weakening rupee may leave little room for the Reserve Bank of India (RBI) to cut interest rates.

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The INR fell to a record low of 58.99 against the US dollar in intra-day deals, deepening worries about the widening current account deficit (CAD) and the outlook for the economy.

Says Nikhil Vora, managing director and head of research at IDFC Securities: "The rupee weakness is a major concern for the markets. The new level/base for the INR has moved away from 52-53 and is now closer to 55-57 levels. I don't see it moving above 60 levels in the next six months."

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Metals melt

Among sectoral indices, the S&P BSE Metal index touched a one-year low - slipping 28 per cent so far in calendar year 2013, while the S&P BSE Power index is just two per cent shy of its 52-week low.

Jindal Steel and Power, Hindalco Industries, JSW Steel, Sesa Goa, Tata Steel and Sterlite Industries declined in the range of 3-15 per cent on Tuesday on demand concerns from China.

Investors have also severely punished stocks of companies that had a significant amount of pledged promoter shares and there were indications of margin calls being triggered on these counters. 

Stocks like A2Z Maintenance & Engineering, United Breweries Holdings, Aanjaneya Lifecare, Core Education and Technologies, Kingfisher Airlines and KS Oils got dumped and hit their respective 52-week lows.

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Andhra Bank, Dena Bank, Dhanlaxmi Bank, IDBI Bank, Indian Bank, Indian Overseas Bank and United Bank of India from the banking sector hit one-year lows on worries of rising bad loans.

Sail, Bajaj Hindusthan, Novartis India, Rolta India, Jain Irrigation Systems, Hindustan Oil Exploration and VIP Industries are among the few notable stocks that touched one-year lows on the BSE.

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Stock strategy

Analysts suggest investors should adopt a cautious approach in the current markets while taking positions and invest in fundamentally strong stocks from a long-term perspective.

"Investors' concerns regarding the rupee and its impact are genuine and I think that the markets are not over-reacting to the situation. Till the rupee is volatile, there will not be fresh money coming into the system. I think foreign investors will remain fence-sitters and will assess the situation carefully before committing fresh capital," says Deven Choksey, managing director, KR Choksey Securities.

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"Given the concerns relating to China, metal stocks will take time to recover. If there is no improvement in the global situation, I don't think one can hope for a recovery in these stocks anytime soon," he adds.

Adds G Chokkalingam, ED and CIO, Centrum Wealth Management: "I would advise staying away from the stocks of leveraged companies or where there have been promoter pledging-related issues.
Stocks such as Adani Ports, GVK Power and Infrastructure, GMR Infrastructure and the PSU banking lot should be avoided at the current levels.
Investors should also stay away from the metals pack, including Sail. However, one can look at Bank of Maharashtra, SBI and its associated banks and private sector banks among the banking pack and Hindustan Zinc among metals," he suggests.

"For those who wish to play the dividend yield factor and can stay invested for over a year, Andhra Bank, Dena Bank, United Bank and BGR Energy are good bets among this lot. One can also buy select metal stocks like Hindalco, Tata Steel and Hindustan Zinc from a two-year perspective," said A K Prabhakar, senior vice president (equity research), Anand Rathi.