Markets are likely to be highly volatile in the next few weeks. In fact, over the last two months, they have already risen 7 to 8 per cent, largely powered by inflows from Foreign Portfolio Investors (FPIs).
Heavy FPI Inflows
In fact, in the month of April in the first fortnight itself, we have seen a staggering investment of Rs 11,000 crores by FPIs in the cash market. If the momentum is sustained, we might see further upside in stocks.
Mutual Funds have also seen some solid inflows for the month of March and they too are sitting on cash. That is likely to be the case as investors tend to invest for the purpose of tax planning and hence inflows into ULIPs and ELSS was largely expected. This liquidity is likely to drive the markets even higher in the coming months.
Tread With Caution
However, it is advised that one should tread with caution in the coming few weeks, until the election results are announced. While most analysts sound optimistic that the NDA would return with a majority, predicting results are always dangerous.
One must not forget that unemployment levels are dangerously high and farmer distress is very real. These problems can dent chances of any government, no matter how popular one is.
In fact, there have been times in the past, when the election results have been completely contrary to expectations. It would therefore be a good idea to stay on the sidelines for some more time.
Valuations Too Expensive
If you look at valuations as well, they are not really cheap. The trailing Sensex p/e is 26 times. If earnings do not grow by 20 per cent in the next two years each, the markets are over valued. In fact, India trades at significant premium to emerging market peers.
Over the last few weeks, we have seen a sudden surge in fund inflows by FPIs, which has led to a good 7-8 per cent uptick since late Feb.
This makes the risk reward ratio not very compelling at the current levels. It therefore make sense to sell the markets on every rally.
Look For Defensives
Under the present circumstances, it is a good idea to place your bets on defensives. Among the better bets would be some of the stocks that give a good dividend yield like Coal India. There is unlikely to be too much of a downside risk in these stocks.
Banking stocks would have been a good bet at the current levels, however, they have climbed a great deal already.