Monday, February 1, 2010

Volatile markets offer value buys for long-term investors

The domestic equity markets gave a stellar performance last year where indices almost doubled from their lows in the same year. It may be a while before this feat happens again and 2010 may well turn out to be not so smooth a ride at least in the first half. The steady upmove has made the markets one of the most expensive equity markets and has led to concerns on excesses in valuations.

This coupled with apprehensions on inflation and earnings, potential tightening of interest rates and possible government action to reduce the fiscal deficit has sent the markets on a tailspin. With important events such as the Reserve Bank of India's (RBI's) monetary policy review followed by the Union Budget on the way, the markets would be driven by expectations and hence be quite volatile during this period.

Most investors approach market volatility with fear. More often than not, investors shift to safer bets when volatility in the market increases. Since the longterm growth story here looks good, any downside should be looked at as an opportunity to enter the markets.

Last year, the markets doubled in less than six months and this left many investors on the sidelines. The pace of the rise was so swift that many investors could not enter the markets. The next few months may provide ample opportunities to enter the markets.

Since the markets are expected to be volatile, here are some strategies investors can employ to make the volatility work to their advantage:

Invest in sectors not affected by inflation

One of the toughest tasks for the government this year would be to keep inflation under check. While supplyside constraints are being given due cognizance, sooner or later, the government will try to control the excess liquidity in the system through monetary policy changes.

While an increase in interest rates would affect bottomlines of many businesses, certain sectors such as education, healthcare, pharma, IT and FMCG will continue to perform.

For instance, the expansion in healthcare will continue due to growing awareness among masses on healthcare services. Though prices of goods will rise, the use of fast-moving consumer durables is related to necessity and lifestyle, and hence demand is unlikely to be restricted.

Investors would do well to add some of these defensive sector stocks to their investment portfolio.

Identify and invest in value stocks

Some sectors and specific stocks generally tend to get beaten down owing to certain short-term events. However, if you were to study the robustness of their business and future growth potential, the beaten down price may offer great value.

Investors should try to identify good stocks which are out of favour due to certain short-term concerns and are at prices which offer ample margin of safety. In the medium to long terms, these could turn out to be your best investments.
Volatile markets often present opportunities to enter. After you have decided which sectors and stocks to invest in, use every dip in the market as a buying opportunity.

Spreading investments over a period of time allows you to average out your costs in good stocks if the markets were to slide further.

Since the markets are expected to be volatile with a negative bias, certain bluechip stocks which had become quite expensive in the last rally may come down to realistic levels. Hence, in addition to mid-caps, largecap stocks may also present good opportunities.

Volatile market conditions offer investors with a longterm outlook an opportunity to build a portfolio of fundamentally-strong stocks at the right price. Investors who have the patience to tide over the volatile times without panicking will certainly be rewarded in the future.

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