ithought – time to be sober & selective.

The influx of FII money into India doesnt seem like ebbing. The index is close to 6200 at the time of writing. As you read this , the markets may well be trading at an all time high. You must be wondering what you should do in the stock markets. If you sold out early , then the feeling of being left out must be troubling you no end. To the investor caught out of the markets , the IPO rush seems to be enticing. If you are still holding stocks , it is time to decide when to sell.

Decision making always works well when the macro environment and the investment sentiment is sized up properly. Let us try and run through the various factors that will drive the markets in the near term.
The markets will be completely fund flow driven in the near future. FII’s continue to invest in India and the rush of money is increasingly concentrated on index stocks. This is mainly on account of a trend among overseas investors to prefer India centric ETF’s ( exchange traded funds ). This has resulted in the valuations of the Index becoming a tad stretched and we do see PE multiples in excess of 25 in several index stocks. The overall index multiple is lower only on account of the under performance of RIL , our index bell weather stock. It is a matter of time before RIL also performs in line with the other stocks and one will see this happen in the near term. When the underperforming scrips in an Index also deliver and align with the rest of the Index, the overall PE of the index will hit all time highs. At that level , i expect money to again start chasing value in mid caps and in the oncoming IPO’s. Their valuations will need close scrutiny and considered evaluation on a case to case basis.

The timing of several large IPO’s during the festive season clearly indicates that we are going to see strong participation in them. Most of those left out of this boom will seek out the IPO’s to get back into the markets. Clearly sentiment will favour IPO. But, i will advice caution and selectivity in choosing issues. Valuations of IPO’s seem stretched and issue pricing already factors in good performance by the issuing companies. The prices discount FY 12 earnings at healthy multiples. Therefore , it is imperative for the investor to be selective while investing in IPO’s. It certainly is time to be very cautious.

Mid caps continue to perform well and business fundamentals are robust in several sectors like auto ancillaries, engineering , consumer durables etc. But, one should appreciate that in several midcaps the valuations are quite steep and already factor in good performance. Therefore , one must book profits where the valuations have run way ahead of earnings. In mid caps which are trading at multiples in excess of 20, it maybe a safe strategy to sell and go into cash.

Overall , you must now be building your cash chest . Selectivity is critical in choosing new investment ideas. The liquidity driven rise of the market will ultimately turn when flows slow down or when the inflows do not match the capital requirement of the issuing companies. I believe that the never ending appetite of Indian companies to raise money will ultimately lead to a correction. The money that FII’s are putting in will get quickly absorbed and any reversal of FII flows will ultimately lead to a sharp crash in Indian stock markets. Clearly, sobriety is the need of the hour.

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