It has been pretty tough for investors since the market crashed in the beginning of 2008. A majority of investors, who entered the market at the end of 2007 or the beginning of 2008 when the indices were at their peak, are yet to realise any
profit on their investment. The market saw a great rally in 2009 and reasonably good uptrend in 2010 but this was because of the low base after the market crash.
The year 2011 seems to be very uncertain with the Sensex remaining range-bound between 14,000 and 17,000. In such a situation, betting on the market is risky. It is very difficult to predict broader indices and macroeconomic factors and extrapolate them to predict the market direction.
How the market looks today
The problem with today’s market is that it has got stuck within a range. This, however, is not such a bad situation to be in. The market is represented by the index (generally Sensex or Nifty). The index is a barometer of general economy. A rangebound index shows scepticism on the part of the investors about the economy. Economic growth rates have been downgraded to sub-seven per cent level by Moody’s. Hence unless there is a stimulus or a trigger, the index will remain range-bound. The trigger could be inflation decreasing to comfortable sub-six per cent level by next year as predicted or faster recovery of Europe and the US.
Market valuation can be decided by looking at the sensex or Nifty Profit to Earnings (PE) ratio. The PE ratio shows the relative valuation. Typically, anything over 20 is overpriced and a crash is imminent.
The Sensex PE on October 21 was 17.97, which showed that the market is fairly valued. A bull run may not be imminent but the prospect of market going down to sub 10,000 levels is very low.
How should you
protect your money?
Experts will tell you to invest in individual stocks and not in the market. Sounds confusing?
This means that investors should study specific companies in a bottom-up approach than going by top-down approach of looking at the indices and then investing.
This will help investors find the right set of companies to invest in. Studying market wide events will not help as the broad indices are not sho-wing any improvement.
Investors should keep an eye on a set of stocks of sound companies and invest when the opportunity arises. Investors should find specific sectors to invest in. There are few sectors that do relatively well when the general economic sentiment and growth projections are below expectation.
Sectors such as FMCG (fast moving consumer goods) can be a better investment as the consumption story is still strong in India.
The other sector could be banking. Banks have been beaten down heavily because of Reserve Bank of India (RBI) increasing policy rates many times in last two years.
The valuation of banks is very attractive. However, remember that inflation is still hovering at double digit levels and once again the central bank has raised the policy rates. Be ready to have the value of your stocks go down the short term.
When in doubt, keep cash
It is better to have cash or money invested in money market instruments such as bank deposit, government short term bonds than invest in doubtful stocks and mutual funds and lose money. You could be tempted to take the cash and invest in the market, but resist this.
The other reason to keep cash is that the market will keep going to the low end of the range, i.e. 14,000. This is where you may get good stocks at cheaper valuations. Most of the investors complain that they do not have enough money when the market goes down because they have lost big by that time. Avoid the mistakes that many investors make. Have cash ready and invest when you find good stocks at cheaper valuation.
Investors can invest in high grade bonds of companies, government securities, and bank deposits as these instruments give you risk free returns of 9 per cent to 12 per cent. It is important to consider the ratings assigned to the bonds issued by businesses.
As far as government bonds and bank deposits are concerned, there isn’t much investors can do as the rates are dictated by these agencies.
Finally, the most important thing is that investors must be ready to face fluctuations. This is a global phenomenon at the moment and will continue to impact stock markets and investment till we have clarity over where India and the world are heading.
(The writer is the CEO of bankbazaar.com)