The Hindu Business Line : Theme India for uncertain times

Just when you were reconciling yourself to a further correction in the market, with chartists indicating that levels around 9800 may be in sight for the Sensex, came the reasonably strong pullback of 380 points on Friday.

Not just that. The provisional figures released by the exchanges (the BSE and the NSE combined) show that foreign institutional investors turned net buyers to the tune of Rs 621 crore on Friday. It is significant as this is the first positive net inflow from the FIIs since the market peaked on May 10. Does this indicate a turnaround for the indices or is it just a relief rally that could ensnare a new set of investors?

Lingering uncertainty

Considering that the market declined 3.3 per cent last week and the bounce-back has only been for a day, it may be too early to take a bullish stance. At the moment, the action of the FIIs can only be interpreted as value buying in select index heavyweights. After all, the uncertainties that have pushed the market into this turbulent phase still linger:

Liquidity contraction: There are no concrete signs that the liquidity contraction is beginning to taper. The FIIs, which turned net sellers since May 10, are in the process of booking profits in the emerging markets. Among the Asian countries, Indonesia and India have borne the brunt of the fall in May of over 14 per cent. The FII outflow of Rs 8,200 crore has more than offset the mutual fund inflows of Rs 7,500 crore for May. And there are signs that mutual funds are running out of funds to deploy in the secondary market.

With several investment banking and brokerage outfits such as CLSA, Nomura and JM Morgan Stanley claiming that 8000-9500 points appears to be a fair value for the market, it may not reverse course in a hurry.

Global turbulence: There is as yet no clarity on whether the US Federal Reserve will call a halt on the Fed fund rate hike or tighten interest rates further at its meeting later this month. In Europe, the Eurozone (comprising 12 countries) manufacturing has reached the fastest rate in nearly six years.

Since this upswing has already built up inflationary pressures within the economy, it is expected that the European Central Bank will increase the interest rate by a quarter percentage point when it meets on June 8. But if this hike turns out to be higher, its implications will be felt across the globe.

Playing the India theme

As the market enters a phase of consolidation, investors may be better off playing the markets by:

Buying into or retaining the undervalued large-caps in the portfolio. Listing constituents in the BSE-500 shows that there are nearly 100 stocks with a market capitalisation of over Rs 5,000 crore each. Based on fundamentals, this correction offers retail investors a good opportunity to diversify their investment portfolio across select stocks within this sample.

Since it will be impossible to call the bottom for the indices, investors will be better off phasing out their investments in small lots over the next few months.

Investing with a long-term perspective makes great sense. Even if near-term blips in economic performance affect stocks across different sectors, fundamentals in the top two-three stocks are likely to reassert themselves in the long run.

Consider, for instance, GE's plans to target an eight-fold rise in revenues to $8 billion by 2010. The company is expected to focus on energy, engineering and financial services to propel this growth phase. IBM will be holding its global investor meet in Bangalore early next week to showcase its Asia story. FDI inflows remain robust, the next round of capex cycle has begun and the pace of cross-border acquisitions shows no signs of flagging. Whether it is Punj Lloyd's plan to acquire Singapore-based Sembcorp or Jindal Steel winning the development rights for 20 billion tonnes of iron ore, there will be no dearth of opportunities for growth.

Playing stocks with a strong domestic theme will be an advantage. Sectors such as infrastructure (capital goods/construction), with its impact on steel or cement, and consumption-linked themes, such as FMCG and retailing, will remain attractive. The strong growth in agriculture is likely to fuel the next round of rural spending. FMCG stocks are likely to be big beneficiaries of this trend. As companies move to Tier-II cities to launch their next phase of growth, the virtuous cycle of investment and consumption will create opportunities for infrastructure and consumption-linked themes.

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