‘Worst fortnight’ a buy chance for some on Street

In every end a new beginning!

Negative global cues and the domestic political turmoil over alleged losses to the exchequer from underpricing of airwaves sold to telecom operators in 2008 pushed the Bombay Stock Exchange benchmark down to a new low in the latest fortnight.

The Sensex shed 1,419.52 points, or 6.75%, over the last 14 days, its largest fortnightly correction in terms of points since October 2009, when it had fallen 1,429.73 points.

Yet, rather than be alarmed, experts suggest equity investors buy stocks before the uptrend resumes. Indeed, going by the growth in corporate earnings and decline in inflation, they say India is in a structural bull market all right.

Morgan Stanley says as much in its India Strategy report dated November 19. “Our view is that every dip is an opportunity to buy Indian equities. No doubt, valuations are on the higher side and hence prospective returns are slowing but a dip makes these future returns more attractive and warrant buying,” analysts Ridham Desai, Sheela Rathi, Utkarsh Khandelwal and Amruta Pabalkar wrote.

The Morgan Stanley analysts note that inflation and capital flows aren’t as much a problem for India as they have been for other Asian countries and policy rates are also more favourable.
Inflation has fallen to 8.62% for September and the Reserve Bank of India has raised interest rates by a quarter of a percentage point in November, in line with market expectations.

India weighs in positively on parameters such as return on equity and earnings growth, too.

“The market is expected to continue remaining volatile for the time being. While valuations might have been said to be stretched, the fundamentals are in place and there is adequate growth,” said Naresh Kothari, president, Edelweiss Capital. Kothari anticipates a 20% growth in earnings for the next financial year.

The major risk anticipated domestically appears to be of an even more severe political upheaval over the alleged 2G scam. The Supreme Court had asked the prime minister’s Office to explain why it delayed action over alleged improprieties in the allocation of 2G spectrum, airwaves used by mobile phone companies to transmit calls. Coupled with global cues such as the fiscal situation in Ireland and rate hikes in China, this caused a number of sectors to hit troughs over the last two weeks.

The realty index was the worst affected, falling 15.2%, even as banking was down 9% and oil & gas fell 8.5%.

Reliance Communications, which has been implicated in the storm over the 2G allocation, has lost 15.28% over the last two weeks. State Bank of India and DLF also recorded double-digit declines.

During the period, foreign institutional investors were net buyers by Rs1,500 crore.

“Over the next couple of weeks, there could be some political turmoil. But over the medium term, this seems a market where investors can consider buying on every dip. We are not too expensive on the basis of earnings expected for FY12. Blue-chips in the banking, auto and infrastructure space could be looked at since they are expected to rise back the fastest,” said Piyush Garg, chief investment officer at ICICI Securities.

There was some panic selling among domestic investors on Friday as fears of further political casualties in the scam intensified. While experts are divided over the possibility of such an event actually taking place, they are unanimous that any volatility associated with such an event should be used by investors to take advantage of the cheaper valuations.

The message for equity investors thus seems to be clear: buy on declines, but do also keep some powder dry to take advantage of any further downside.