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Stock Doctor

Heightened volatility

GS-Sood
Dr GS Sood, Business Editor gfiles

THE recent correction in the market, mainly due to the renewed concerns over slowing global growth, and the current lull might suggest that the best days of the market are over for now. Some macro-economic factors are also weighing down market sentiment. The uncertainty due to the winding of the QE3 programme and possible interest rate hikes by the Fed may compel investors to take a cautious approach. The days to come may witness heightened volatility due to mounting concerns over ebola, European slowdown, and cut in IMF and World Bank forecasts for global economic growth. The strength in the US dollar is likely to continue as the Fed ends the QE programme and other currencies such as Europe and Japan show relative weakness.

All this may see portfolio flows to emerging markets getting adversely affected, though India has till date performed better than its peers due to the strength shown by the rupee. But if the current trend continues, it may not escape the fate of its regional counterparts since other markets such as the US will start offering better yields. The latest IIP numbers and corporate earnings for Q2 show that a sustained recovery still remains elusive and the demand situation is yet to see a significant pick-up.

Investors, especially FIIs, have started getting restless in expectation of announcement of bold reforms that have remained elusive till date. Though it is too early to expect such announcements, the Prime Minister is doing the right thing by picking low-hanging fruit in the area of reforms to unclog the minor irritants. The government has taken some baby steps in terms of the ordinance for coal, some labour reforms and getting diesel subsidy out of the way. Big reforms may probably come when they are least expected. The recent wins in Haryana and Maharashtra may further bolster the party to use the current honeymoon period to get some big reforms lined up in the coming Parliament session. However, the economy may not suddenly accelerate, though it may reinvigorate the investment projects.

So far as the market is concerned, long-term prospects remain intact while volatility may increase in the short term if US rates begin to rise earlier than anticipated. However, this may indeed be positive for India. India being a net commodity importer is better placed than other emerging markets such as Brazil, Russia, and South Africa who are commodity exporters due to softening of commodity prices. Otherwise also, as per IMF estimates, the Indian economy is expected to grow 5.6 per cent this year and 6.4 per cent in 2015 whereas China’s growth is likely to slow down from 7.4 per cent this year to 7.1 per cent, making the Indian market more attractive. Valuations at 16 times forward earnings are not that stretched, though a further upside will purely be based on earnings expansion that is likely to accelerate in FY15 and FY16, driven by improved growth, higher sales and profit margins. Investors are advised to invest systematically and use the corrections to add good stocks to their portfolio with a long-term perspective.

The author has no exposure in the stock recommended in this column. gfiles does not accept responsibility for investment decisions by readers of this column. Investment-related queries may be sent to editor@gfilesindia.com with Bhardwaj’s name in the subject line.

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