The possibility of an Federal Reserve interest rate hike coupled with the uncertainty in China is likely to keep the stock markets volatile in the coming days and fund managers say this is the best time to invest in large cap stocks as valuations are cheap and returns over a three-year period look attractive.
Large cap stocks are companies that have a market capitalisation of more than Rs 20,000 crore. “Large caps have some value in this market and as the recovery pans out, these stocks appear better placed to deliver,” said Nimesh Shah of ICICI Prudential AMC.
Large cap stocks are mainly traded on the BSE 100 and BSE Sensex, which includes the top 30 companies by market capitalisation.
Since, July — when the likely event of a US rate hike impacted markets globally — the Sensex has fallen 8.6%, touching a low of 25,741 points on August 24 when the Chinese government devalued their currency and spooked markets further. In fact, since August the index has fallen about 9.1%.
What this implies is that companies that populate the Sensex are now relatively cheaper compared to July. “Lower commodity prices, especially crude oil, provides room to lower input costs for Indian companies,” said Shah.
But the volatility in markets is also likely to come from the buzz around higher US interest rates. The fear is that foreign institutional investors would ditch India and go back to the US in the case of a higher rate.
But Bank of America Merrill Lynch India economist Indranil Sen Gupta argues that India would fare better compared to other emerging markets.
“While there could be a knee-jerk sell off across emerging markets, India would likely emerge as relative value, given support for equities due to volatility in China’s equity market and to bonds with the S&P downgrading Brazil to junk,” he said.
Also, both top-down investing —broadly based on macro economic factors — and bottoms-up investing — typically looks at select companies across sectors — are looking positive helped partly by falling commodity prices.