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Home > Business > Special

Is it right to buy stocks now?

Shobhana Subramanian | October 18, 2005

After nudging 8,800, the Sensex has retreated to 8,200. If that has unnerved you, it shouldn't. Corrections are part of any market and given that the market rallied sharply in such a short span, it's not surprising that prices are coming off. After all, there are those who will want to cash out.

At the current level, the Sensex still trades at 15 times estimated FY06 earnings and India continues to remain one of the most expensive markets in the region.

The correction could continue -- the general view in the market is that a fall in the benchmark index of another 500-600 points is quite possible. The slide in the Indian market has been triggering by selling in the emerging markets and not by any India-specific factors.

In fact, fundamentally nothing has changed. Going by the initial numbers for the second quarter, corporate India seems to be on track to turn in yet another good performance this year.

In a quarter that is generally considered to be weak thanks to the monsoon, top line seems to be growing at a good clip, while the bottom line growth shows little signs of slowing down.

With monsoon having been fairly good, rural demand should pick up which would benefit sectors such as two-wheelers, tractors and FMCG products.

In fact, two-wheeler sales in September, traditionally a weak month, grew spectacularly. Credit growth in the September quarter has been the highest ever with commercial banks lending over Rs 100,000 crore (Rs 1000 billion).

Results of a couple of key banks show that they are able to lend profitably. As for sectors where India has a strong competitive edge such as technology, once again players have proved their ability to grow the business even on a high base.

Thus, while companies will not be in a position to turn in earnings growth of 25-30 per cent every year as they did in the past, they could post a 15-17 per cent earnings growth in the next few years.

So, given its growth potential, the Indian market will continue to be an attractive investment destination. And given the possibility of a secular 6 per cent GDP growth, the Indian market would continue to remain expensive.

For those of you who did not venture to put in money all this while, this may be a chance.

Says Anup Maheshwari, head-equities at DSP Merrill Lynch, "Foreign flows should pick up again in some months and, in the meanwhile, one could start investing in the markets."

Adds Sandip Sabharwal, head, equities, SBI Mutual Fund, "For those who have not been investing, this is an opportunity to put in money." Its best to opt for the systematic investment route and buy regularly rather than through a lumpsum payment.

Also, it would be a good idea to study a company thoroughly before subscribing to its initial public offer. In a bull market, one can often get away even with a second-grade investment. But with the market correcting and valuations expensive, it's not always easy to price stocks.

Diversified equity funds have earned you over 55 per cent over a year, outperforming the Sensex, which has given a return of 43 per cent. Speciality and mid-cap funds have given an annual return of 62 per cent. However, mid-cap funds do carry a greater risk.

While the BSE Mid-cap index rose faster than the Sensex it has also fallen more from its peak -- 8.3 per cent compared with 6.7 per cent for the Sensex. So it's probably better to have a larger exposure to large cap diversified funds.

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