As the investment ground breaks into a financial earthquake around us, the one question retail investors are asking is: what should I do now? Should I sell and run or is this an opportunity to buy? The short answer: long term investors need not panic, short term investors need not buy.
With a bankruptcy (Lehman Brothers), a takeover (Merrill Lynch) and an unfolding (AIG) at the global level sending stocks across the world crashing, could it be different for India?
“There is no uncertainty regarding Lehman and Merrill Lynch now,” said Sudip Bandyopadhyay, chief executive officer, Reliance Money. “But if uncertainty around AIG is not resolved then there might be more problems in the short term.”
Rajiv Anand, chief investment officer, IDFC Mutual Fund echoes this short term sentiment. “Markets are going to be difficult for sometime as we see large entities in America unfolding, which in-turn will induce investors to get more risk averse.”
With this sort of 800-plus point intra-day volatility becoming a once-a-month phenomenon, the short term risk around equities has multiplied. And so have opportunities for those willing and able to hold on to investments for two years or more.
“There are a number of blue chip companies that are currently available at their book values or break up value and thus it calls for a good entry for the long term,” said Bandyopadhyay.
At a market valuation level, the Sensex is currently trading at a price to earnings multiple of 16.8 and a whole lot of stocks are available at low valuations. This is close to its June 2006 level.
The strategy for investors should be to enter with caution and focus on blue chip stocks with large market capitalisations. “Investors should look to enter quality stocks in a disciplined manner with an investment horizon of at least two to three years,” said Anand. “With that horizon, one can expect good returns.”
Investors might get tempted to enter smaller stocks. “But at a time when big blue chip companies are available at attractive valuation there is no point picking up mid caps,” said Hitesh Agarwal, head of research, Angel Broking.