The easiest thing in this market would be to go with the herd and hit the “sell” button because of the heavy weather surrounding global markets and Indian fundamentals. Here are some reasons why negativity would sell — Europe is near melting point, the risk-on party is over and, consequently, capital flows have dried up. No prizes for guessing what happens to the rupee and India’s twin deficits if capital flows dry up.
Contrary to popular perception, strategists are actually looking to slam dunk the current market conditions, rather than dumping India. Unlike last year, the bets are not on safe havens like technology and consumer stocks alone. Strategists are looking at the market’s valuation (which has been de-rated) with a renewed keenness. There are several justifications for this change in perception. Many experts believe the weak rupee is now creating an opportunity for capital flows to return, as it’s unlikely to stay at these levels forever. The risk-reward from a currency stand-point, too, looks positive.
Manishi Raychaudhuri of BNP Paribas believes equities tend to bottom out when the market’s one-year forward price/earnings (P/E) ratio falls to 12x. Currently, India’s forward P/E is at 12.5x. Estimated earnings yield is at 8.2 per cent, while bond yields are at 8.53 per cent. This resulting yield gap of 0.37 per cent is the point at which equities usually bottom out, explains Raychaudhuri. Though sentiment does not value reason, at best markets could fall three to five per cent, say strategists. Given the solvency issues of some European states, markets have also ignored positives like the deferment of the General Anti-Avoidance Rules and falling commodity prices. Crude oil has fallen from $127 a barrel levels to $110.52.
How can one ride the current wave in the market? There are several good stocks trading at a reasonable price. For instance, M&M, Tata Motors, Idea, Hero MotoCorp and Cairn India, have been beaten down in recent times, but remain fundamentally good companies. Macquarie, which has been rather bearish on Indian equities, is now attempting to beat the herd mentality by not obsessing over sell calls. The brokerage says it is warming up to the idea of the government’s attempts on the power sector and has called this the bottom.
Though underweight on financials, it says: “4Q FY12 results reflect the strong non-performing loans (NPL) cycle. It might take another one to two quarters for NPLs to peak out. However, stocks have already corrected in anticipation and seem very attractively valued at 0.7-0.8x price/book. We are re-introducing State Bank of India and adding Power Finance Corp in our model portfolio.” It is bullish on consumer stocks but sees no cheer in materials stocks.