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In Volatility Lies Opportunity

Monday, September 10, 2012
Manik Kumar Malakar

India’s equity markets are volatile! That is a fact for various reasons which are causing India’s markets to swing wildly and in this volatility lies opportunity. That’s because at present levels the risks are diminishing.

“Though the impact of global factors is quite common among all markets, the Indian market is relatively less risky for two reasons,” says G. Chokkalingam – ED and CIO Centrum Wealth Management.

First, India’s economy still remains as the second fastest growing economy and also relatively least impacted by the global factors and India’s equity markets have thousands of listed stocks, with a proven track record of success. “There are a large number of micro stories (midcap stocks) successes in the long run,” Chokkalingam continues.

A recent report by a global brokerage noted that India’s beta score is 0.99. A beta score of over 1 indicates stability while a score of less than 1 indicates volatility. Beta wise India is 9th out of 21 on the emerging markets index.

“Yes, India’s equities are volatile,” agrees Rahul Arora, Chief Executive Officer, Nirmal Bang Institutional Equities, when asked about beta factor in India’s equities. So what would be the reason for the volatility in equity markets? The “Indian equity market is quite volatile for two set of factors, i.e. fundamental and perceptions,” says Chokkalingam.

The fundamental factors include political impasse and therefore, delays in implementation of reform measures, peaking out of interest rate cycle, etc. on the domestic front. Globally conflicts in oil producing countries have led to a spike in crude oil prices, a despite significant correction in global economic growth, economic uncertainties in the western world, etc., on the global front.

And remember news travels today with the speed of light thanks to technology. “Technological developments have led to instantaneous reactions and also simultaneous executions by the vast majority of the investors for variety of news flows which in turn are leading to disproportionate rewards or punishments to the stocks / markets,” he continues.    

So should one invest in equities at this point of time? “At these levels we are avoiding equities,” says Arora. He feels that a 5 to 7% correction would be a good entry zone. Arora continues.  

In contrast Chokkalingam feels that Emerging Markets would continue to be attractive as Developed Markets still need some time to recover from their macro-economic woes.

Now the end of the year is fast approaching and with it the possibility that Western Investors will seeks to divest from India’s equities to ‘square’ off their books. So will India’s equities still attract buying interest? “Certainly, valuations are attractive and India’s equities are back at levels last seen in 2007, though there has been a vertical shift in fundamental parameters,” Chokkalingam says.

So lastly where would the markets be at, around November? “We firmly believe that fundamentals do make significant impact only in the medium to long term while perceptions and news influence the markets in the short term,” says Chokkalingam of Centrum.

And what would be the sectors that would attract interest till then? “We like Pharma, FMCG, Cement and Infra. The first two more as they are defensive; the latter two are more of a valuation call,” says Arora, of Nirmal Bang Institutional Equities.

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