Stocks To Remain Firm As Buying Emerges At Lower Levels

Indian stock markets are facing the negative news with ease. Stocks are showing resilience despite the profit booking by traders and speculators as long-term investors are continuously taking positions at lower levels.

At the same time, stocks are not in a runaway hurry. Last week’s surprise 25 basis points rate cut was no surprise to the markets, and the customary euphoric reactions were missing.

Besides, two consecutive holidays in the markets are likely to see lighter trading as punters are unlikely to take aggressive positions. Hence, stocks are expected to move sideways in the coming weeks.

Retail investors are also turning circumspect and that can be seen in the tepid retail response to the Endurance Technologies IPO.

Retail investors have seen minor losses in the last three of five IPOs, and hence have been unable to roll over investments into the next IPO. Most retail investor book out of the IPOs on listing, and then invest the proceeds in the next IPO.

This week also marks the beginning of a new earnings season with IndusInd Bank, Infosys and TCS slated to release their second quarter earnings. As the stock markets are trading at above-average valuations earnings growth will play a major role in the future direction of the markets.

The markets are trading PE levels of 23 times earnings. And to move this valuation needle lower, earnings have to be better than the last few quarters’ average. For instance, if earnings rise by 10 per cent, the PE levels will barely budge lower to around 21 times, where as an earnings growth of 20 per cent could bring down the markets to reasonable PE multiple zone of 19 times earnings.

As the earnings season progresses, the markets will increasingly begin to distinguish the outstanding performers from the also-rans, which means that there will be increasing stock-specific volatility in the coming weeks.

On the other hand, crucial data like industrial production are also slated to be released this week and this will also keep the spotlight on the broader market. Keeping an eye on the broader macro news to make purchases in select individual stocks is the strategy to follow in the coming weeks.

However, long-term investors are looking at entering the markets at every dips, and that is a good sign. Foreign investors continue to dip into the Indian markets. While most of this money comprises of short-term ETF money that arbitrages on the carry trade opportunities due to lower rates in the US, there is also buying due to improving macro fundamentals such as growing profits.

This corrective, consolidation phase may not last long. Before the year ends, stocks could scale new peaks as there is money pouring in via IPOs, leveraged buying, and tactical shifts in portfolios from real estate to financial assets. But corrections so far have been short-lived. Which means investors have to be quick to bag the bargain moments.