The Hindu Business Line : Market View

It's tempting to believe that despite all the violence in May and June, little has changed to disturb the long-term up trend in emerging markets such as India. After all, the end of any major bull market is typically marked by far greater sociological excesses, much higher valuations, substantial balance-sheet damage and a rapid pick-up in inflation.

Our base-case is that for emerging markets at least, this is 1994 redux. Led by the US Federal Reserve, central banks back then raised interest rates sharply and ended a protracted period of easy money. At the end of that year, asset classes with strong underlying fundamentals (that is, the US market) were left standing while the liquidity hothouses (emerging markets) never quite recovered. If emerging markets are the asset class of choice this decade - helped by well-documented underlying economic and political changes - these markets should then resume their long-term up trend once the monetary adjustment is over.

As the markets settle down in a range following the bounce from very oversold conditions, countries with weaker macroeconomic fundamentals are finding it harder to get off the ground while some markets are now well above their June lows.

Morgan Stanley Growth Fund Quarterly Newsletter

The markets are at a stage where valuations are fair and positions are light. Therefore, despite the volatility comfort level is pretty high. Small orders on either buy or sell side are able to move the prices with high impact costs. Therefore, our recommendation to investors is as follows;

— In a fair value market maintain neutral allocation towards equities

— Fundamentally both the economy and the corporate sector areis on a sound footing and discounting the current oil prices, interest rates and below-normal monsoon prediction.

— Asset allocation and systematic investment plans are the best way to guard against volatility. They are tools for optimum, not maximum, return.

— Experience suggests that large caps move ahead of mid caps in times like this, notwithstanding the latter's valuations.

— Mid-cap stocks look fairly attractive in terms of valuations but will have large bouts of volatility, as impact costs are very high.

— Investors should look at a blend of large- and mid-cap funds at current levels with 3-5 year horizon on a systematic investment basis.

PruICICI Mutual

India is no stranger to large market drops. Sharp corrections have been a regular occurrence in the Indian market and typically after a short, intense rally that drives equity prices and often P/E ratios as well substantially higher.

A fall of more than 25 per cent can definitely be classified as a major correction - but in the face of the long-term progress of the stock market, the big falls of the past are often relegated to mere footnotes in market history. The reason for this is that the actual long-term trajectory of the stock market is determined by two principal factors: Stock valuations and corporate earnings. While the current bout of volatility does seem disconcerting at first, it perhaps makes sense to take a step back and look at the present situation from the perspective of valuations and earnings growth.

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