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What to do in a volatile market?
Mon, 2 Aug Pre-Open

CNNfn reports that July 2010 was the best month for the US markets in a year. The Dow Jones index rose by 7% during the month. The same can't be said of the Indian markets, which gained less than 1% during July. However, if one were to look at the performance over the past 12 months, there is little to choose between the two performances. Both the Sensex and the Dow have shown average monthly gains of around 1.2% during this period.

Data Source: Yahoo Finance

What has caused the weakness in Indian markets? One big reason for the weakness in Indian stock prices in July was the mixed performance reported by Indian companies for the quarter ended June 2010. Most companies managed to show decent to strong recovery in sales during the quarter. However when it comes to profits, the picture was less than perfect.

How the heavyweights performed during the June 2010 quarter?
Company Sector Sales growth (%) PAT growth (%) Reason for weak performance
ONGC Energy (9) (25) Sales, profits down due to higher subsidy burden
SAIL Metals (0) (12) Impacted by higher input prices
NTPC Power 6 (16) Profit impacted by higher fuel costs
Infosys IT 13 (3) Wake hikes impact profits
Hind. Unilever FMCG 8 (2) Intense price competition and higher ad costs hurt profits
Hero Honda Auto 12 (2) Profit impacted by higher metal prices and failure to hike product prices owing to intense competition
ACC Cement (3) (26) Weak volumes and lower realisation hurts overall performance
Source: Equitymaster Research

The above table shows the June quarter performance of some leading Indian companies across sectors. For most of them, higher input prices and the inability to pass on the same to customers in the face of a fledgling economic recovery was the key reason behind the weak profit performance during the quarter. And hearing what most of these managements have said after their companies' result announcements, the pricing power is not coming back to them anytime soon. In such a scenario, only a higher sales growth in the future can drive profits for Indian companies.

So, these weak performances from top Indian companies kept the markets in tenterhooks during July.

And where do we go from here?
We believe given that the result season is now over, the markets will restart taking cues from whatever is happening globally. And whatever is happening globally as of now isn't that good either!

So while the economic situation in the US is far from showing any sustainable improvement, the European debt crisis is just gradually unfolding. Then there are fears of a forced Chinese slowdown. All these factors are combining to make stock prices very volatile.

And this level of volatility will continue till the markets have any fresh trigger points. And that can either be a fresh gush of global liquidity. Or a sharp improvement in the domestic economic recovery. Or even a fall in inflation as expected by the RBI.

So, what to do as an investor?
Overall, the opportunities to buy good companies at low valuations are still not available in plenty. In such a scenario, the best thing you can do is make a list of good quality stocks - well-managed simple businesses - that will be worth buying if the markets crack.

You see, it is very important to buy even good companies only at the right prices. And the next correction can give you that opportunity.

For information on how to pick stocks that have the potential to deliver big returns, download our special report now!

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Feb 23, 2018 03:35 PM