Tuesday, May 24, 2011

Investors can pick value stocks as markets correct

The equity markets have been volatile. The foreign institutional investors (FIIs) have become net sellers. The stock markets are going through a correction phase. The reasons are many. The results of some key companies have been below expectations. There are concerns of a persistent inflation, rising interest rates, input pressures and concerns on the overall economic growth being affected.

Factors behind volatility

The main reason for the correction is the disappointments on the results front. There is also some nervousness in the global economy, especially in China and US. There is a lot of volatility in the commodity and currency markets also. In the currency markets, the US dollar is losing against other major world currencies. The Euro almost touched USD 1.50 due to concerns over new job creations and the overall US economy recently.

There have been concerns on the sustainability of the US economic recovery after reports of a slowdown in the services sector, and lessthan-expected jobs created in the private sector. In the US, the Federal Reserve has continued with its soft monetary policy but it failed to yield the expected results in terms of triggering a lasting economic recovery. The inflation rate is continuing to rise.

There are also concerns of a slowdown in China due to the monetary policy tightening measures. This led to sharp volatility in the commodity markets. Added to this was the disappointing results and a sharp hike in the key interest rates by the Reserve Bank of India (RBI) during its recent monetary policy review, and the markets have become jittery. The markets have come down by almost 10 percent over the last few weeks.

The markets are still expected to trade in a range with a negative bias in the coming weeks. The global concerns are causing uncertainty in the domestic markets. The government is committed to taking strong measures to control the inflation rate. The RBI recently raised the key interest rates by 50 basis points to check the rising inflation rate which is expected to aggravate further due to the fuel price rise.

FII factor

The FII mood will be an important factor for market direction. This in turn will depend on the global interest rates, global recovery, and other opportunities available for FIIs to invest in. For a recovery, a lot will depend on normal monsoons also. In case the monsoon spreads out across the country, it will give a push to the economy.

Time for value picks

However, this is an opportunity for long-term investors. You can use the market corrections to pick value stocks . Yet, individual investors should not come out aggressively in the markets. On the contrary, you can go for value buys, bluechips which are now available at a good price. There is no point in taking aggressive positions in the markets right now because no one is certain about the future direction, or about how long it will be before the trend reverses or even stabilises

Source : ET

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