Use dips to accumulate good quality stocks

Last week the US and European equity indices dropped 3% to 4%, while the Sensex fell 1%. Globally, Germany posted 5.8% fall in its exports as against the expectation of a 4% fall. Now the European markets are worried whether Germany will fall into recession. China's GDP growth is expected to be 7.3% for the third quarter of 2014 – weakest since the first quarter of 2009. Brazil has fallen into recession. Western sanctions and recent fall in oil prices have aggravated the problems of the Russian economy.

On the domestic front, the IIP growth came at 0.4% for August 2014 versus 0.5% for July 2014. For the week ended October 10, 2014, the foreign portfolio investors have sold stocks worth Rs 1,231 crore. India's foreign exchange reserves fell for the fifth straight week to a five-month low of $311.43 billion as on October 3. Investors at large are asking whether the domestic equity markets can fall the way we saw in 2008? The repetition of such disaster to the domestic equity markets is most unlikely.

The US might take efforts to contain the fall in other economies – last Friday the Fed officials indicated going slow on removal of stimulus measures to help the global economy. The European Central Bank president says that "expanding the Bank's balance sheet is the last monetary tool left to revive inflation although there is no target for how much it might be increased". Chinese premier says that "China's economy will not suffer a 'hard landing' like some fear, but will bring a positive impact to the global economy". China is actually in a better position than India in managing the economic slowdown – this $9 trillion economy has over $4 trillion of forex reserves. It can opt for significant stimulus packages for boosting the economy. So on global front, the risk can be postponed by 2 to 3 years.

On the domestic front, the political stability, acceleration in investments from both internal and external, crude oil price crash and severe correction in palm oil (which together should help in moderating inflation and reducing trade deficit and fuel subsidy) should enable the economy to recover. Vodafone has won Rs 3,200 crore tax dispute – if the government leaves this issue here, it would be significantly positive for FDI inflows into the country.

Despite the failure of monsoon, sowing of kharif crops is down just 2% as on October 10, 2014. Though IIP number is disappointing, for the cumulative period of April-August 2014, IIP growth year on year stands at 2.8% as compared with flat production (zero growth) in the corresponding period of last year. In the September quarter, the indirect tax collections have improved as compared with June quarter. India and the US alone perhaps are the major economies firmly expected to improve their GDP growth for the year ahead. Hence, the Indian equities are likely to get affected least as compared with other merging markets. Long-term investors can use possible dips to accumulate good quality stocks without losing valuation comfort.

The writer is managing director, Equinomics Research & Advisory Pvt Ltd