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India's Third Giant Leap

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The best approach to investing in stock market
Thu, 25 Jun Pre-Open

The recent volatility in the Indian stock markets might have left many disappointed. From touching life time highs just few months back, the markets recently witnessed correction as actual earnings and monsoon forecasts did not match the expectations. That said, one cannot ignore the fact that Indian stock market has been among the best performers among the Asian peers. As an article in Livemint suggests, it is the only market that boasts of positive dollar returns on a year till date and month till date basis.

Much of this resilience can be attributed to huge domestic institutional buying. This has more than offset the selling pressure on account of heavy FII selling in last two months.  It is indeed a positive and welcome change, considering that FII money is hot money and over reliance on the same can leave markets highly vulnerable to volatility. However, to take this resilience for granted could turn out to be a big mistake.

Most of the domestic buying is on the back of strong sentiments about economic recovery and expectation of growth in the corporate earnings. A lot of stocks have witnessed re rating on the basis of expected recovery, even though signss are yet to be seen at the ground level. Any delay in recovery is likely to downward revision in earnings expectations, and this will most likely be followed by adjustment in valuations, leading to a correction. Also, while it is good that the dependence on FII is relatively low, markets are still vulnerable to the foreign money flow. And in case any of the global economic policies restricts cheap money, a correction cannot be ruled out.

It is obvious that one cannot predict overall earnings and global developments in advance. The best way then, to deal with this uncertainty is the bottom up approach of investing we believe. Over the years, the stocks that have been multibaggers have gone through the same economic cycle as witnessed by value destroying stocks, the differentiating factor being fundamentals and management quality. So these are the aspects one should focus on while taking investment decisions. At the same time, a reasonable asset allocation can be the best way to build a margin of safety to face downtrends better.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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