THERE REMAINS A MOST PUZZLING QUESTION THAT WHERE IS MARKET HEADING AND SHOULD ONE BUY AT THESE LEVELS OR WAIT FOR SOME MORE TIME?
There are many concerns which has be answered before arriving to any conclusion. Inflation,Fiscal Deficit & Monsoon, Crude Oil prices and many others...... Lets discuss some of them here to get the overall picture, where our economy and consequently the markets are heading.......
On Interest Rate & Inflation:
The RBI has hiked the interest rate by 0.5%. This is the ninth time that the RBI has hiked the rates to control the supply of money in the economy.The reason it wants to control the money supply is to bring down the inflation, which continues to languish at the higher levels.higher inflation translates to higher input costs, which in turn is adding pressure to the companies earning margins. These margins are getting further depressed by higher interest rates. It is double whammy and the investors are stuck in the middle of it.
At such a time, the one question on everyone's mind is where to invest? Which sectors would do well in such times of turmoil?
During the efflux of time analysts believe that 'defensive sectors' should be considered best during such times. Investors tend to prefer this sector to hold the equities.
Defensive stocks are defined as stocks that provide good devidends and have stable earnings regardless of the state of the overall stock markets.These are the stocks that tend to remian stable even during difficult economic conditions. Sectors that are traditionally termed as defensive sectors include food, consumer goods(FMCG) and pharma sectors. In particular, the FMCG sector has been touted to do well on the back of India's consumption led growth story, however pharma could also be termed under the same roof as due to rising health concerns and living habit of the modernized life style. Various analysts and experts justify that these sectors are worth investing in even at current valuations based on the future stream of earnings.However it should be borne in mind that key nature of the defensive stocks is their stable earnings. Such stocks may not exhibit phenomenally high earnings that would justify very high valuation multiples. Hence certain proportion of defensive stocks in portfolio is always good to maximize the return on investments.
Some Good Stocks to look for: HUL, ITC, MARICO & DABUR in FMCG and LUPIN, ORCHID & CIPLA in PHARMA.
Keep eye on these stocks, rise in these stocks with huge volume shows that there is buying in defensives, which may indicate a sell-off in the market any time in future.
On Fiscal Deficit & Monsoon:
Its not the corporate sector lone that is likely to bear the brunt of RBI's rate hike. The Finance ministry too is worried of the impact of such move on the finances of the country. Ministry had set and ambitious target of fiscal deficit to GDP ratio of 4.6% for the current fiscal, which stood at 5.1% in the previous fiscal and hence ministry was looking for some sizable improvement on that number. This target was set with 9% growth in GDP and very low inflation. However few months after the projections the alarm bells have started to ring in. The RBI's rather hawkish stance and the persistently high inflation have meant that a 9% GDP growth may not be achievable after all. And this in turn could throw cold water on the Government's tax collection exercise and thus also put in jeopardy the fiscal deficit target. All is not lost though. If monsoon holds up well,rural consumption could get a boost and help shore up Government's revenues a bit.Now as expected the normal monsoon,may give boost to the margins and ease inflation, which shall help in improving the sentiments per se.
Now let us justify the current Sensex level and future course. The thumb rule to the justification of valuation in reference to EPS and PE lies on the inference that
Valuation =EPS of Sensex * PE of Sensex
Currently EPS of the Sensex comes to be (for FY2011-2012):1150
(because 1000+15% of 1000= 1000+150=1150, where EPS of FY2010-2011 was 1000, and due to contraction in the margins of the companies, CAGR of 15% is considered instead of 18% to 20%)
The projected EPS of Sensex (for year 2012-2013)comes to be:1322.50
There are many concerns which has be answered before arriving to any conclusion. Inflation,Fiscal Deficit & Monsoon, Crude Oil prices and many others...... Lets discuss some of them here to get the overall picture, where our economy and consequently the markets are heading.......
On Interest Rate & Inflation:
The RBI has hiked the interest rate by 0.5%. This is the ninth time that the RBI has hiked the rates to control the supply of money in the economy.The reason it wants to control the money supply is to bring down the inflation, which continues to languish at the higher levels.higher inflation translates to higher input costs, which in turn is adding pressure to the companies earning margins. These margins are getting further depressed by higher interest rates. It is double whammy and the investors are stuck in the middle of it.
At such a time, the one question on everyone's mind is where to invest? Which sectors would do well in such times of turmoil?
During the efflux of time analysts believe that 'defensive sectors' should be considered best during such times. Investors tend to prefer this sector to hold the equities.
Defensive stocks are defined as stocks that provide good devidends and have stable earnings regardless of the state of the overall stock markets.These are the stocks that tend to remian stable even during difficult economic conditions. Sectors that are traditionally termed as defensive sectors include food, consumer goods(FMCG) and pharma sectors. In particular, the FMCG sector has been touted to do well on the back of India's consumption led growth story, however pharma could also be termed under the same roof as due to rising health concerns and living habit of the modernized life style. Various analysts and experts justify that these sectors are worth investing in even at current valuations based on the future stream of earnings.However it should be borne in mind that key nature of the defensive stocks is their stable earnings. Such stocks may not exhibit phenomenally high earnings that would justify very high valuation multiples. Hence certain proportion of defensive stocks in portfolio is always good to maximize the return on investments.
Some Good Stocks to look for: HUL, ITC, MARICO & DABUR in FMCG and LUPIN, ORCHID & CIPLA in PHARMA.
Keep eye on these stocks, rise in these stocks with huge volume shows that there is buying in defensives, which may indicate a sell-off in the market any time in future.
On Fiscal Deficit & Monsoon:
Its not the corporate sector lone that is likely to bear the brunt of RBI's rate hike. The Finance ministry too is worried of the impact of such move on the finances of the country. Ministry had set and ambitious target of fiscal deficit to GDP ratio of 4.6% for the current fiscal, which stood at 5.1% in the previous fiscal and hence ministry was looking for some sizable improvement on that number. This target was set with 9% growth in GDP and very low inflation. However few months after the projections the alarm bells have started to ring in. The RBI's rather hawkish stance and the persistently high inflation have meant that a 9% GDP growth may not be achievable after all. And this in turn could throw cold water on the Government's tax collection exercise and thus also put in jeopardy the fiscal deficit target. All is not lost though. If monsoon holds up well,rural consumption could get a boost and help shore up Government's revenues a bit.Now as expected the normal monsoon,may give boost to the margins and ease inflation, which shall help in improving the sentiments per se.
Now let us justify the current Sensex level and future course. The thumb rule to the justification of valuation in reference to EPS and PE lies on the inference that
Valuation =EPS of Sensex * PE of Sensex
Currently EPS of the Sensex comes to be (for FY2011-2012):1150
(because 1000+15% of 1000= 1000+150=1150, where EPS of FY2010-2011 was 1000, and due to contraction in the margins of the companies, CAGR of 15% is considered instead of 18% to 20%)
The projected EPS of Sensex (for year 2012-2013)comes to be:1322.50
(because 1150+15% of 1150= 1150+172.5=1322.50, where EPS of FY2010-2011 is taken 1150, and due to contraction in the margins of the companies, CAGR of 15% is considered instead of 18% to 20%)
On this basis we are currently trading around:
PE=18500/1000=18.5 times , which is neither cheap nor stretched under normal circumstances. But are the PE of 18.5 times justified after the interest rate hike by RBI and earnings downgrade by FIIs and participants and the answer is NOT AT ALL. Under the earnings downgrade scenario and margin contraction the lowest possible PE should be 13.5 -14 times. On that basis the base of the market( under the worst case scenario) should be should be 13500-14000 based on last year earnings, 1000 and 15525-16100 based on current year earnings projected,1150. Hence in under the worst case Sensex should not go below 15500-16000. Keeping the Optimistic view for PE the upper limit shall be 19.5-20 times which translates into 22450-23000. Hence under no circumstances market could head above 22450 optimistically till March 2012. Hence the broad range of the market shall be 16000 to 22500.
Since at the current time we are pessimistic about the earnings and talking of de-rating it is expected that markets shall head lower to the range of 16500-17000 gradually, if the monsoon fails to cheer the expectations. This could happen by next 45-60 days. 16500-17000 translates into 4950-5100 of Nifty.
Keeping all these factors into consideration one should look to wait for some more time, and start building portfolio in a staggered manner starting from 5350-5300 levels.However, going forward, if the cues turns to be positive by next few days and the market sustains these levels and inches up gradually say Nifty above 5650 and Sensex above 19100, one must enter into the market to build a short term portfolio.
The important events to watch are EGoM meeting on Petrol & diesel price hike,tomorrow on 11th May, IIP data on 12th May and other data on 13th May also the state assembly elections result and movement of crude.
ONE COULD LOOK INTO THE FOLLOWING STOCKS TO BUY ON EVERY DIP TO BUILD LONG AS WELL AS MEDIUM TERM PORTFOLIO:
SKUMAR NATION
ARVIND
ALOK
TIMKEN
COAL INDIA
PIRAMAL GLASS
CAMLIN
INGERSOLL RAND
ORCHID
CANFIN HOME
LIC HOUSING FINANCE
OBEROI REALITY
SURAJ DIAMOND
V-GUARD
VIP
RELIANCE IND
ITC
HUL
LUPIN
CIPLA
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.Nothing in this article is, or should be construed as, investment advice.
Disclaimer:
This is neither an offer nor a solicitation to purchase or sell securities. The information and views contained on this blog are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in, or have positions in the securities mentioned in their articles. Neither I (Vikas Srivastava) nor any of the contributors accepts any liability arising out of use of the above information/article. Reproduction in whole or in part without written permission is prohibited.
SKUMAR NATION
ARVIND
ALOK
TIMKEN
COAL INDIA
PIRAMAL GLASS
CAMLIN
INGERSOLL RAND
ORCHID
CANFIN HOME
LIC HOUSING FINANCE
OBEROI REALITY
SURAJ DIAMOND
V-GUARD
VIP
RELIANCE IND
ITC
HUL
LUPIN
CIPLA
Safe Harbor Statement:
Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.Nothing in this article is, or should be construed as, investment advice.
Disclaimer:
This is neither an offer nor a solicitation to purchase or sell securities. The information and views contained on this blog are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in, or have positions in the securities mentioned in their articles. Neither I (Vikas Srivastava) nor any of the contributors accepts any liability arising out of use of the above information/article. Reproduction in whole or in part without written permission is prohibited.
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