Enter markets after the correction

Improvement in economic data coming from the US jobless claims,manufacturing index,and consumer confidence suggests that the various stimulus packages announced by the government have arrested the pace of economic slowdown. The rally was also triggered by the unprecedented co-operation among G20 nations,which mobilised US1 trillion to kick-start the global economic engines. US treasury secretary Geithners plan to support toxic assets also played an important part.

Besides,Citibank and J P Morgan issued statements suggesting that they had earned profits in January and February. Due to this,the fear of more bankruptcies receded. Conditions within the credit markets have also improved. That risk perceptions have changed is clear from the record decline in Libor rates.

The collapse in commodity prices has relieved the margin pressure on many companies and made them attractive. And after a steep decline,many stocks had already priced in a lot of bad news and were available at attractive valuations. For instance,we were able to spot a lot of asset bargains,cash bargains and high dividend yield stocks.

amp;149;Why have foreign institutional investors FIIs turned net buyers in the equity market?

FIIs had pulled out around Rs 538 billion in 2008,and they have invested Rs 128 billion in equities since March. So to put things in perspective,they have not put in an extraordinarily high amount of money. The money India got is just its share of the money allocated to emerging markets EMs. All EMs have benefited from new asset allocation by global funds in early April. Moreover,EMs are on a higher growth path compared to developed ones. That is why FIIs are investing money here.

The collapse in international oil prices and fertiliser prices has ensured that the subsidy burden on the Indian government will be lower this year,so the rupee has appreciated. Many hedge funds participated in the equity markets to benefit from the appreciating currency.

amp;149;Will this rally sustain or are we likely to see a correction?

This rally is not the onset of a bull market; rather its a bear rally. Many experts are talking about V shaped and U shaped recovery,but we anticipate a long-drawn recovery that would look like a protracted L.

The markets are due for a correction as they have rallied by more than 50 per cent from the lows in March,and there is a good case for profit booking.

Remember that every dip will be bought into. Many investors have missed this rally and will be keen to take advantage of lower prices.

amp;149;Most market participants are speaking of an imminent correction. In your view,will it be a sharp one a return to the 8,000-plus level or a mild one?

Any increase in risk aversion due to disorderly unwinding of global imbalances could catalyse a possible correction. We expect a correction in the range of 15-20 per cent. Thus we see the market going down to a level close to 9,500.

What worries us is emerging signs of protectionism in developed nations. This could severely jeopardise global trade and de-rail a stock market recovery. We shall keep a close eye on leading indicators pointing to a likely recovery in economic activity in the coming months before we re-enter the markets.

The current rally has seen many stocks rise more than 100 per cent from their lows. It would be a good idea for investors to book profits wherever available,and buy on dips. We would also advise investors not to invest all their cash at one go but to invest in parts.

amp;149;The Sensex is now trading at a PE of 15-16 times FY10E earnings. With valuations already high,what should investors strategy be?

The long-term average of the Sensex is 15-16. The short-term strategy for investors should be to book some profits or hedge their portfolios,as a short-term correction is likely. But investors with a long-term view should look for buying opportunities in every correction.

Although we expect to see signs of stress on account of the slowdown,Indian companies earnings have been among the least volatile among EMs. Overall leverage of Indian companies is also quite low: the average net debt to equity ratio is just 0.45x.

amp;149;What are your expectations from corporate earnings over the next two quarters?

Earnings are likely to remain under pressure for the next one or two quarters,as the full effect of the earlier monetary tightening measures and the credit squeeze feeds through the economy. In a couple of quarters,margin improvement should become visible with lower commodity prices and the lagged impact of interest rate cuts shoring up profits.

We expect corporate earnings to grow by 8 per cent in FY10.

amp;149;For the last one year,the mantra in the market has been 8211; stick to defensive sectors. Should investors continue to follow this advice or should they now shift to other sectors?

A defensive investment is a misnomer. Many people have lost heavily investing in so-called defensive stocks. Pharmaceutical and FMCG are considered defensive,but ask any investor who has endured pain investing in Hindustan Unilver for the last decade or investing in Ranabxy or Dr. Reddys in the last five years. We would recommend power and capital goods as investment ideas once the markets correct.

amp;149;Any final words on the prospects of the markets?

A lot has been done in the form of stimulus packages and providing adequate liquidity to cash-starved sectors. So cyclical sectors like commodities and financials may face the brunt for the next couple of quarters in terms of earnings,but we anticipate markets to run into a new bull phase in late 2010 which will bring in good times for cyclical sectors.