Investors may have to brace for more turbulence in the stock market next financial year, as unyielding inflation coupled with rising interest rates could slow economic growth and spark corporate earnings downgrades.
While volatile stock market conditions would give value-hunters an opportunity to identify winners for the next three years, investments in shortterm bonds and gold would help investors beat the possible gloom in the stock market this year.
“Equities look vulnerable from a one-year perspective, but investors should take advantage of this to buy quality stocks from a two or three year perspective,” said Ashish Kehair, head, wealth management, ICICI Securities . The benchmark Sensex closed 0.7% higher on Monday, before giving up on early gains as the Union Budget proposals for 2011-12 did not have enough steps to lift the sagging investor sentiment.
“There wasn’t much in the Budget for us to change our view that there could be another 10-15 % correction in the Sensex over the next three months,” said Saurabh Mukherjea, equities head, Ambit Capital . “This correction will be driven by uncertainty on the political front, a growth scare in the fourth quarter of FY11 and compression of corporate profit margins in 2011-12 because high interest rates and input costs remain major concerns,” he said.
The Sensex has fallen about 16% so far in 2011, led by foreign institutional investors selling equities worth 8,900 crore. Hopes of a rebound in the US economy, worries about a slowdown in India’s economic and corporate earnings growth and corruption scandals involving ministers in the ruling coalition and top companies prompted foreign investors to pull money out of India after investing around $29 billion in 2010.
Fund managers and brokers warn the worst may not be over for Indian stocks as further spike in crude prices, in the event of more instances of political instability in oil-producing regions, could trigger more sell-offs. Nandkumar Surti, chief investment officer at JP Morgan Asset Management India, said, equities would continue to be exposed to external challenges such as the US growth and rising oil prices.
Crude oil prices hit a two-and-a-half-year high of $119.79 last week. India, among other emerging markets, has been struggling to contain inflation, driven by higher food and commodity prices, forcing the Reserve Bank of India to raise policy rates seven times since March 2010. Finance minister Pranab Mukherjee said, in his Budget speech on Monday, inflation continues to remain a concern.
Ambit’s Mukherjea recommends stocks of companies in consumer goods and durables, tobacco and paint sectors, which are less likely to be impacted by rising prices and would benefit from the government’s rural spending. His least preferred stock picks are in media and entertainment, power generation and distribution and construction sectors.
Wealth managers, including ICICI Securities’ Kehair, advises investors to stay away from stocks or bonds of real estate companies. Firm interest rates and high prices may force property buyers to defer purchases that may impact companies’ earnings. Investors should increase allocation to gold, but should not hope for great returns, Mr Kehair said.
“It should be to hedge the portfolio against inflation,” he said. Most wealth and fund managers recommend locking money in shortterm mutual fund debt products, such as fixed maturity plans, to benefit from higher interest rates. “Investors can park lumpsum money in fixed income schemes of shorter tenure and avoid long-term bonds. But, if oil prices fall, long-term bonds may appear attractive,” Mr Surti said.