An Investment Approach to Equities @ Nifty 8200
Posted on 15-May-2015 Comments 8
Amidst a major bout of volatility, the Nifty has corrected close to 11% from its peak levels. This correction was triggered by a variety of factors. Firstly, the government has let the cat among the pigeons by bringing up the issue of retrospective MAT for Foreign Portfolio Investors (FPIs). Minimum alternate tax is charged on book profits even if there is no tax payable as per the Income Tax returns. In the last budget, the government had clarified that there will be no prospective MAT on FPIs; however the issue of retrospective MAT on FPIs was left open. Hence the confusion and the FPI selling! Secondly, there have been concerns over profitability of key companies like Infosys, Tata Motors, HCL Tech, Lupin etc. This has also depressed valuations. Thirdly, there is the issue of a certain slack in the reforms process that seems to have crept in. Lastly, there are global factors like US interest rates, Greek crisis and a slowdown in China. Each of these factors could have a different set of implications for Indian companies.
The bad news is that all the 4 problems above are real. The good news, however, is that all the above four problems are sentimental and not structural in nature. Let us look at them in detail.
MAT on FPIs:
This was largely responsible for the sharp sell-off by FPIs. However, we believe that at Rs.600 crore (value of notices sent till date); this is hardly a major problem to contend with. It is not as big as Rs.40,000 crore as it was originally made out to be. The 11% correction may have more than factored this into prices.
Profitability of Companies:
While it is true that certain industries like IT, pharma and oil have seen margin pressures, they are all related to temporary factors like Exchange Rates and crude oil prices. We believe that most of the heavy weight companies like TCS, Reliance and ICICI Bank have announced encouraging results.
Slack in Reforms:
The NDA government has been hamstrung by the lack of a majority in the Upper House. But that was always common knowledge and the government has demonstrated that it has a Plan-B in place. Joint session of parliament or even better negotiations with opposition parties may be the answer. Bills may get partially diluted, but most critical bills will still go through.
Global Factors:
This could be the joker in the pack. Again there is room for hope. With US growth slowing down and inflation weak, rate hikes may be some time away. That is good for capital flows into India. Greece, as an economy, may falter but fewer people are now talking about the death of the Euro or a full-fledged financial crisis. And China slowing down may impact commodity demand but India’s edge in growth will only get reinforced.
What should be your Trading and Investment strategy @ Nifty 8200?
Your investment and trading strategy in this kind of a market should be predicated on these lines:
- As traders in equities keep strict stop losses. Also ensure that overnight risk in this market is kept to the bare minimum.
- The Nifty may continue to be extremely volatile in the range of 8000 to 8350. Instead of trying to play the volatility both ways, try to play the range. That will be more effective.
- Buy quality defensives on dips. Stocks with pedigree and proven earnings like Lupin, Infosys and Asian Paints have corrected sharply by 15-20% in the last month. Use these opportunities to buy into such stocks from a short term trading perspective.
- Be doubly cautious when you short the equity market. A combination of high volatility, value buying and short covering can play havoc on your short strategy
- For the short term stick to defensives. You may find FMCG, IT and pharma boring, but that is where the action could be concentrated in the next few months.
- For beyond one year, focus on cyclical stocks. If Indian GDP has to grow at 7.5%, then there has to be a revival in capital spending. This is not possible without a revival in bank lending. Frontline capital goods companies like L&T and private banks like ICICI Bank could be good bets from a medium term perspective.