ithought – Market strategy for 2011.

The markets have corrected after a sustained rise. Retail Investors have been waiting in the wings expecting a correction. Now , the retail investor needs to decide if he should enter the markets now or wait longer for a sharper fall . The dilemma of the investors who were left out of the rally of the NIFTY from 5000 to the recent peak continues.

The investor’s strategy have so far centered around three things.
1. They have redeemed from equity funds or sold stocks at every rise.
2. They have focussed on IPO’s and
3. They have held higher levels of cash.

Now that the markets have shown some signs of correcting , it is time to re-examine the merits of this strategy.
The bountiful monsoons , the stable growth in different sectors of the economy and the sustained interest in Indian equities from FII’s are factors that augur well for Indian equity markets. These factors will ensure that any correction in prices will be used as a opportunity by serious investors.

China is showing signs of tightening interest rates and changing its orientation towards consolidating global commodity markets. The intent of China seems to be to soften global commodity prices and stabilize them. Towards achieving this China will probably allow interest rates to rise gradually along with the calibrated appreciation of the yuan . This essentially means that the speculation in global commodities will definitely soften as China shows its intent of moving away from its earlier strategy which pushed prices up.

This augurs well for India which is a major consumer of commodities after China. Businesses which add value to commodities will see softer raw material prices and export oriented businesses will also show an improvement. The leadership of the Indian stock market which centered around banking may become more broad based .

Market leadership becoming more broad based would mean that we could see the rally once again consolidating for further moves. The investor should identify the businesses which will contribute to market performance in the future. Investors need to identify the new frontline as we will see a reconstruction of the performing basket of stocks in the NIFTY / SENSEX . The reconstitution of the index to include Coal India is likely and the question really is only `when’ and not `if’. This is a move that will be significant for the future. The investor needs to also look at other index heavyweights in the energy space which have clearly not participated in this rally like NTPC, RIL etc. These companies are in investment mode and are likely to show resilient growth in the years ahead. As the markets leave 2010 behind and move on to the next year , it may start looking at the performance of the subsequent years and discounting the earnings gains of the future. The timing of this re rating is however dependent on the sustainability of the global trends. Indian Telecom is seen as troubled waters to fish in. But, with the rough weather likely to recede and with better policy management in 2G and the implementation of the 3G roll out in 2011 , telecom will once again start showing greater traction and rebound strongly. Telecom sector is another sector which will regain its place among the index frontline and key stocks will once again start delivering.

While i advise re entering the markets , investors will do well to use every sharp fall to invest a part of his cash . It will not be prudent to rush in and invest all the money in one go. A phased approach will work well in volatile markets. The mutual fund strategy should be fund specific and scheme- specific. The investors must closely study the performance of their mutual funds. The fund managers have shied away from investing aggressively and are unlikely to reverse this trend anytime soon. This could impact their performance going forward as they have failed to assemble a line up of future performers in their schemes. Several schemes have more weightage of the companies which have already delivered. This could mean that investors must scrutinize each scheme and take decisions of holding or switching based on whether the fund manager is having adequate objectivity to his approach.

The cash levels can be maintained at comfortable levels within a band of 10- 25% . This should depend upon the risk appetite of the individual investors and according to the buying opportunities that the market corrections present to investors.

Happy investing!

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