Time to shop for blue-chips

2011 has been a tumultuous year for the domestic markets as negativity and pessimism has engulfed the investor sentiments

2011 has been a tumultuous year for the domestic markets as negativity and pessimism has engulfed the investor sentiments. The Indian markets have been dealt a double whammy 8211; on the one hand the Euro crisis has led to uncertain and volatile markets and outflow of risk capital,while at the same time domestically the policy logjam has lead to supply constraints and execution bottlenecks in a host of sectors,slowing growth and contributing to inflation. On top of this,while other commodity prices have cooled a bit,crude remains high and our current account deficit is widening,along with which the fiscal deficit is also going to be exceeded substantially from budget estimates.

We could at least have had easier going on the mineral resources front,such as coal and iron ore. There too the policy stalemate has played havoc and is further compounding our inflation problem. As a result of these supply constraints,GDP growth has slowed down from the 8-9 per cent trajectory to more like 6.5-7 per cent and correspondingly,the corporate earnings momentum has also decelerated to 8-10 per- cent levels.

Going ahead,the concerns on the domestic and global front will weigh on the market due to which it will remain volatile in the near-term. The markets may witness some downside and see 15,000 levels,however,in the absence of any catastrophic event that could significantly drag down the markets,I expect markets to find valuation support at these levels.

With markets correcting about 22 per cent in this year,valuations have bottomed out across most sectors. There are interesting investment opportunities in both defensive and interest-sensitive sectors. IT sector looks a good bet as rupee depreciation is a positive for IT companies and for the next 5-7 years,in a high-inflation economy like India,the rupee will have a depreciating bias,over and above any bouts of FII inflow driven appreciation.

Pharma has also done well within the defensives,and I think they will continue to do well. After all,the developed countries are grappling with very high medical care costs and India has a proven ability in pharma manufacturing,creating large scope for Indian pharma to gain market share.

At the same time,within interest-sensitives,the private sector banks are still a good bet in my view. Ultimately it8217;s an entry barrier business and now with the largest bank being short of capital,the competitive intensity has also reduced to an extent. Amongst the capital goods infra space,some of the blue-chip companies growing by 5-7 per cent better than Sensex and which should trade at 25-30 per cent premium are available at throwaway valuations,leaving a good 20-25 per cent upside.

In contrast,sectors such as cement,capital goods and infrastructure are currently in bad shape,as these are skewed towards GDP growth. The contraction in GDP estimates to 6.5-7 per cent,will lead to continued weakness in these commoditised sectors.

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By and large,the markets have factored most of the negatives. With inflationary pressures showing signs of abating is also a big positive. As per the historical trend the bearish cycle lasts for around 4-5 quarters,after which the stage is set for revival. The last recessionary phase lasted for around 5 quarters; from the last quarter of FY08 to the first quarter of 2010. Some sort of solution on the Euro front,coupled with some positive news flows in the domestic front on the policy side should bring an end to the FII selling and improve liquidity in the markets.

The Sensex itself is trading at about 12.5 PE which is a comfortable valuation zone and one cannot make their investment call more precise in terms of timing the valuation bottom. These valuations offer a great opportunity for the long-term investors to make sizable returns and it makes sense for them to start accumulating quality blue-chips into their long-term portfolios.

Author is MD Institution,Angel Broking