Markets Strategy: A Buy On Dips As Indices Look Overvalued

It was an immensely volatile week for the markets in India. While Monday saw a spectacular rally, Tuesday and Wednesday saw immense bouts of volatility, thanks to surgical strikes launched by India and Pakistan's reaction on Wednesday.

However, most market participants have realized that war is not an option for either India or Pakistan and this led to buying support at lower levels. In the end, the Indian markets ended the week with gains of near 0.7 per cent.

Going ahead, we are unlikely to see great gains for the markets, given the fact that we have elections slated in the next two months and the possibility of results being announced by mid-May. That is just 2 and half months from now.

Nobody is sure of the election outcome. Until six months ago, it seemed almost certain that Narendra Modi would return to power for a second term. He might still, but, given the farmer distress and the outcome of election in the three states of Madhya Pradesh, Rajasthan and Chhatisgarh which the Congress bagged, the final result is difficult to predict.

A third key factor has also been the alliance of the BSP and the SP in Uttar Pradesh, which could pose further challenges for the BJP.

In any case election outcomes are difficult to predict. Going by pure fundamentals, Indian markets remain overvalued. The trailing p/e of the Nifty is 26.32 times, as on Feb 28. This is rather steep and way beyond the historic average. As such it makes sense to stay on the sidelines.

The one positive for the markets over the last week is the sustained buying from Foreign Portfolio Investors. Domestic institutions on the other hand have sold heavily. Most of these institutions may want to sit on cash ahead of the elections. Apart from this, there are reports that fund flows into domestic institutions maybe slowing down.

On Thursday, domestic institutions sold a staggering Rs 5,240 crores of shares, while Foreign Portfolio Investors net bought Rs 3200 crores worth of shares in the cash market. It would be interesting to see, if FPIs continue to lend support to the market.

If the markets had fallen steeply, it would have made sense to invest. However, with the Sensex at 36,000 points, it is not too attractive, though one must admit that several stocks at the moment continue to languish.

Strategy to adopt

It is a good idea to buy the dips and then sell the rally. The markets are expected to trade in a range in the coming weeks. Volatility could largely be induced on account of global factors, given that the tensions along the border have now subsided. Sitting on a large amount of cash is now desirable, given that markets are overvalued.

In fact, for high networth individuals sitting on cash can still yield good returns, given that many banks are now giving you interest rates. Stock market investors should now start bracing for tremendous volatility. Look for good quality stocks with a sound management. It is likely that these stocks may see limited downside risk in an environment of severe damage to stock prices.