MARKETS GO HIGH AND HIGH – DO WE JUST STAND AND SIGH?

By Ruma Dubey

One would actually think that the news of a lower GDP never really came! Or as analysts always say, “market had already discounted the fall and is now looking ahead!”

Is that what this new high of the market all about –discounting of all bad events and already looking ahead at a much robust picture?

If that is the case then we Indians are most certainly the most optimistic people on earth as all that we see ahead, at least if one goes by the indices on Dalal Street, is simply a time of glory and great growth.

The market is today buoyed by the PMI news. The Nikkei India Services Purchasing Managers' Index, or PMI, rose to 52.2 in May from April's 50.2, marking the highest since October and a reading above 50 indicates economic expansion. The report states that the pick-up in service sector growth seen mid-way through the first quarter [of fiscal 2017] suggests that GDP could expand at a faster rate should growth momentum be maintained in June. Now that’s surely some great news to celebrate and look ahead.

But while the market is booming, take a close look at the stock surging. It is mostly stocks with the highest market capitalization. Livemint has put out a very telling report stating that since 16 May, when the BSE All-cap index peaked, nearly three-fourths of all stocks traded on BSE have fallen in value, and about half of all stocks have fallen by over 5%; the S&P BSE Sensex has risen nearly 2.3% during this period.

Even the fund houses and HNIs are putting all money in such high cap stocks as they, like rest of us, when the market jumps up like this, feel that markets will come down and they need to be ready for that. Investing in large cap stocks keep them insured against the ups and downs as they feel, large cap stocks do not fall as sharply as mid and small cap.

What have the FIIs been upto? They ended May with net purchases at Rs.9,957 crore and on Friday, first day of June, they were net sellers at Rs.451 crore. Mutual funds have been as good a buyer as the FIIs – in May their net purchases were to the tune of Rs.9622 crore, which is more than what the FIIs bought.

In such a scenario, we as small retail investor need to stay very focused. The action for us is more stock specific, prices driven by earnings, completion of project, getting new orders, forming new alliances/JVs and staying away from all debt ridden companies. Buying contrarian at this juncture is a huge risk; like BHEL is butchered down, yet it makes no sense to buy at lows as we need to wait and watch how Q1FY18 fares; maybe that will give you a much better and cheaper option?

A few points to keep in mind in these markets:

• Buy only into sound companies, with no corporate governance issues. Or else, more fall is certain as more and more skeletons will tumble out of the cupboard.
• Do not buy companies hitting new lows which have huge debt and major liquidity issues.
• To buy into low priced stocks is a good idea but not those which are in a crisis mode. On the other hand, if it is a veritable blue-chip like Dr.Reddys, even notwithstanding the US FDA crisis, every low is a perfect time to accumulate this stock as a company of this big a repute is sure to get over this crisis. They simply cannot afford to go down!
• Do not buy the penny stocks hitting rock bottom – there is no “Infosys or L&T” in the making there.
• Sectors like infra, capital goods have solid stocks; keep an eye on these stocks as they will stand to benefit the most when the reform process takes off. L&T, Thermax, Crompton Greaves are few very strong companies and they never go out of the “blue” list.
• The right time to go bottom fishing is when markets show a few days of higher closes or even if it shows consistent weekly higher close.
• Be like this investor– Ashalata Maheshwari. Buy quality, high dividend paying stocks and be a long term investor. Then such vagaries and falling knives will not hurt.
• Buy blindly into stocks mentioned in our Stock Recommendation section, you will never go wrong.
• Simple rule of investing – stick to companies whose business you can understand and if they are into exotic forex instruments, steer clear. Balance sheet is the guiding star, follow and understand it, you will never go wrong.