What do diets and investments have in common? With New Year’s resolutions still being new, dieting can be an extremely tough task. Even if one is motivated to lose those love handles, the love for junk food and alcohol may distract you from achieving your goal. Some control themselves diligently and even starve themselves for almost 5 days of a week, but as the sun sets on Friday, suddenly the drinking glasses, till then dumped in a cupboard, start jiggling for attention. The impact of your dedication during the week gets negated by the hedonistic weekend binge. The same holds true for equity investors.

When there’s no hope of a bright future, markets reflect a sombre silence. Trading volumes drop and and equity prices linger. But even the slightest hint of improvement drives investors crazy (as they starved during bad market conditions), and when they taste the blood again, they defy all logic. Markets move up beyond what the economy and performance of corporates can warrant them to. The balloon of expectations inflates and nothing really improves at the grassroots level. Something similar has happened to Indian markets over last 2-3 years. Markets experience a sinking feeling at that time.

Markets are already down due to unfavourable global developments. To add to their worries, gloom looms heavy on corporate horizons. Other domestic factors haven’t been supportive for growth either.

Cheap can get cheaper; don’t try to time the market

Data as on January 22, 2016
(Source NSE, PersonalFN Research)

As reported by the Business Standard, on January 25, 2016, companies in India have seen muted sales growth in the October-December quarter of Financial Year (FY) 2015-16. Although many companies are yet to report numbers, the Q3 is going to be a disappointing quarter for India Inc. Close to the 236 companies that have shown the Q3 results as of now, collectively posted a decline of about 2.5% in sales. However, their operating profit has jumped nearly 10%, while net profit has hovered at around 8%.

Reasons for poor performance

Factors such as slow growth in the consumer demand, lower investments in capacity additions, and the problem of bad loans have affected Indian companies negatively. On the other hand, falling energy prices, thanks to the diving crude oil, have helped them improve their operational performance. Volatility in the movement of Indian Rupee against U.S.$ is also expected to drag Q3 performance of Corporate India.

What to expect?

Although the markets have dropped substantially in the first 20 odd days of 2016; valuations are still high at the index level. Price to Earnings (PE) ratio of Nifty Midcap 100 index is about 25 times the trailed earnings of underlying companies. Nifty 50, which represents the movement of India’s top 50 companies by free-float market cap, trades at lower PE multiple of about 20. Going forward, the movement of indices will depend on the pace of reforms. It is now widely believed that, unless the Government turbocharges the growth engine, Indian companies may not see any significant improvement in their revenues and profits.

From this perspective, the budget session of the parliament is going to be crucial. The Government, hoping to pass the GST bill in the upcoming session, will have a herculean task balancing between fiscal prudence; especially in bridging the gap between revenues and expenditure and providing stimulus to the economy. Unless all efforts of the Government translate into higher profits, higher wages, and more jobs; demand is unlikely to revive. Unless Banks rid themselves of the rot on their balance sheets; their ability to disburse loans aggressively looks confined. The Government will have to work simultaneously with the RBI to contain retail inflation. No easy sailing, in short.

What you should do?

It is important for you to refrain from following the market momentum. Although falling markets present good entry points, avoid investing blindly in the hopes that markets rises will benefit you. Please remember, companies that witness a fall in their stock prices in weaker markets, may not see any revival in rising markets. That’s always a possibility. Take out some time to run a quality check on your portfolio of stocks and mutual funds. Do a rebalancing exercise if needed>.

Those who want to invest in fresh funds, but are unsure of what should they buy, should restrict themselves to investing in diversified mutual funds.

Ideally, you should invest in funds that have a consistent record across timeframes and market phases. A fund that satisfies the above conditions is ideal for you, if it invests in companies with a long term view. PersonalFN provides unbiased mutual fund research services. Before you commit your hard-earned money to mutual funds, thoughtfully consider your risk appetite and financial goals.

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