Political implications of Lokpal bill to weigh on markets

August 21, 2011

(The views expressed in this column are the author’s own and do not represent those of Reuters)

Indian stock markets continued to languish with benchmark indices down by 4 pct for the week and 13 pct for the month. Global stock markets crashed on fears of a recession in the U.S. combined with debt troubles in Europe.

The Nifty finally gave in to the all-important support level of 5000 and the fall of 200 points thereafter was fast paced on account of fresh shorts being built up in the markets, margin calls and tired investor selling.

We are close to the lower band of the one-year forward P/E as we had seen towards the end of 2008 and early 2009. Some other parameters such as price/book value and dividend yield of the Nifty 50 stocks indicate the same.

The overall health of corporate India is better than what it was in 2008. Historically, the markets bounce back from these levels making investment in blue chips like L&T, ITC, SBI, GAIL, Coal India and Grasim a wise move. The most difficult question is when do we expect to see the bounce back?

Hence, those investing now should have the ability to take the pain of another mindless fall and patience to live through the turmoil. Those who choose to wait for a bottom may end up not investing at all as psychologically it is difficult for most investors to buy on a bounce back — one tends to again wait for the bottom.

Developed economies are expected to grow in the range of 1-3 pct in terms of GDP and emerging economies would continue to grow at a relatively faster pace. We expect Indian GDP growth to be in the range of 7.25 to 7.50 pct thus making it a relatively attractive destination. Given the fact that India contributes only 1.6 pct in global trade, almost everything produced is consumed internally, making it comparatively immune to the turbulence around.

It’s a great time to look at dividend yielding stocks which have a reasonable cash rich status. It makes sense in exploring such opportunities to cash in on the market downturn. Some high dividend yielding stocks which are going ex-dividend in the next couple of weeks are Hero Motocorp, GNFC, Tamil Nadu Newsprint and Engineers India.

In sector-specific action for the coming week, shares of non-banking finance companies may be in the limelight as the Reserve Bank of India is shortly expected to release its draft guidelines for new private sector bank licences to seek public comments. We see Shriram Group, L&T, LIC to be strong contenders. On the other hand, we believe IDFC and IFCI may not figure contrary to popular perception. The guidelines would focus on past performance in case of IFCI and IDFC cannot remain infrastructure-focused by converting into a bank.

We feel the Nifty is likely to respect support of 4800 and it may be the right time to start investing in a staggered manner assuming there are no negative political surprises on the domestic front having longer term instability implications.

One of the important factors this week, in addition to international cues, would come from the Ramlila Maidan where Anna Hazare is fasting for the passing of the Jan Lokpal Bill in parliament. It needs to be seen whether the UPA government is able to tackle its biggest challenge during its current tenure and come out with minimal damage. Any signs of political instability could be the last nail in the coffin for Indian markets which will negate all the reasons to invest mentioned above.

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