Caught between bulls and bears

A listless market with a downward bias does not leave many options for investors. Have a long-term strategy.

‘Buy on panic and sell on euphoria’ is the mantra to follow if you want to make money in the stock market. But what do you do when the market is not going anywhere?

Last Diwali, the market was euphoric with the BSE Sensex closing at 21,004.96 (November 5). Since then, the market has corrected nine per cent. Investors are getting edgy because they are unsure if the market has bottomed out.

According to Ambarish Baliga, vice-president, KarvyStock Broking, “The upside is clearly over. A part of the ‘hot money’ (or, money from foreign institutional investors) that had come into Indian stocks has already gone out. The remaining should also flow out over the next few months.” And yet, this is no time to desert the markets, say players.

According to investment advisor S P Tulsian, “The current market is the perfect time to pick up quality frontline stocks. And, it stands true for both new and existing investors.”

New investors
Any dip in prices or valuations may be an opportune time for new investors to get in. But market experts feel investors would do well for some more time.

“Valuations are not cheap. At 16.5-17x price/earnings (P/E) one-year forward multiple, we are trading in a slightly expensive zone. A 10 per cent downside would correct valuations to a mean level to 14.5-15x one-year P/E,” says Amit Nigam, fund manager, BNP Paribas Asset Management.

For an individual with a long-term view, say 5-10 years, it should not be worrying. And, there are data to back this statement. No matter what time you enter the markets, staying long term helps you make money. The last 10 years have seen returns from the Sensex touch 354 per cent (as on January 20, 2011). So, if you had invested Rs 1 lakh a decade ago, your investment would have been worth Rs 4.16 lakh (as on December 31, 2010).

New investors should be looking at individual companies rather than sectors that are the current flavour.

“Opt for companies that show sustainable earnings and are to a great extent insulated from fuel price rises,” advises Arun Kejriwal, founder of advisory firm KRIS.

Experts also advise investing in a staggered manner. “The best strategy for incremental money is to spread it over and not do it in one lump sum. So, a systematic investment plan (SIP) may be the best strategy,” says Harshad Patwardhan, investment manager, equity, JP Morgan Asset Management.

Disciplined investing is bound to work. Even if one were to invest directly in the markets, he/she should be investing the same amount periodically, irrespective of the rise or fall in the market.

Existing investors

It might be a good time to reshuffle your portfolio, get out of dud shares and reinvest the money in good stocks. Most stocks will be available at a discount as well.

Existing investors with a short-term view might have capital preservation as a priority, while the long-term investors will be looking for capital appreciation from his investments.

Conservative short-term investors are advised to reduce the shock of a falling market by increasing their cash component by way of selling when the market bounces back.

“Even if they are looking to exit the market, they should do so when the market rises marginally,” adds Baliga.

This is also a good time to bring about changes in asset allocation to minimise risks. So, if you are invested in aggressive sectors such as information technology and auto, where valuations are still high, it might be a good time to move into defensive sectors such as pharma and others, which are not likely to witness a fall in a year, or are likely to experience high volatility. You can also use derivative exposure to cushion this impact.