Markets Stable But Bouts Of Volatility Call For Some Hedging

Stock markets are consolidating ahead of crucial high profile central bank meetings across the world. The US Fed, Bank of Japan and European Central Banks are expected to keep their rates steady and continue with similar stimulus packages. A big fear that the US Fed can raise is being discounted, and markets are breathing easy.

During such big events, investors could do well to hedge their portfolios. Hedging does have some cost, but the little protection can go some way in covering any losses the portfolio might see, particularly at higher levels.

The reason why it would be good to hedge is because the reactions to the market on the downside is normally quite severe, and that results in sharp losses in the portfolios.

Many mid- and small-caps that recoiled last week due to high expected volatility have regained some stability. Needless to say, as markets have been keeping pace at higher levels, investors have to be extra choosy in picking good companies.

The big picture on the market front is that it's expensive in the short run on valuations, but there is a fair degree of comfort if you view the longer horizon. But the quick gains at these levels will be difficult to come, hence a longer term view is in order. Investors can, and must, continue to buy the dips for the long haul.

The 9,000 mark on the Nifty will prove to be a tough resistance level to crack because short-term traders will tend to book profits there, and earnings have growth has still to show meaningful gains. So we may amber in and around these levels for a few weeks till the markets chart a fresh course on the higher side.

Currently, the PE levels are still at frothy levels of around 24 times earnings, and that does not provide a high degree of comfort. The monsoons have been playing truant lately having turned from about 3 percent surplus last month to about 5 percent deficit at present. Forecasts of a 100 percent monsoon level of their long period averages is still good.

But the heartening thing continues to be the fact that the foreign investors are still gung-ho about emerging market stocks, and India. The US Fed may keep rates on hold which will fuel the bulls for another month till the next big event around the US election day on 8 November, 2016. That would be the time investors could consider hedging their portfolios.

A select segment of mid- and small-caps are doing well. Among them are stocks like Excel Crop Care (13.6%), Cox and Kings (11%), Aarti Drugs (10.9%), Bartronics (10.7%). Investors could look at some smaller pharma companies that have still some way to go.

On the whole, the sideways consolidating markets calls for investors to make tactical moves now booking profits in the overvalued counters and building up positions in the undervalued ones. Some stocks are too expensive to warrant an entry at these levels, while there is meaningful undervaluation in some other counters. Hence, book profits at higher levels and seek very lowly-priced inexpensive counters when there is a correction.