The BSE-Sensex has witnessed a sharp up move in the last three months having registered a gain of about 13%. This has surprised many as both corporate earnings and/or economic data have not shown any meaningful improvement during the same period. In fact, the crude has risen from US$90 to US$115 during the last three months. This signifies that inflation and current account deficit may widen further. The fiscal condition is also deteriorating amidst rising subsidy burden while policy paralysis continues to hurt growth. Even the rainfall during this season has been below expectations.
So, what is driving the current rally? The answer is liquidity. Since July 2012 the Foreign Institutional Investors (FIIs) have pumped in Rs 130 bn into the Indian equity markets. Nonetheless, the liquidity is chasing defensive sectors like healthcare and FMCG as investors have turned risk averse. As a result, valuations in these sectors have started expanding. Thus, one can selectively book profits in these counters.
The cash generated here can be invested into sectors that are beaten down if one wants to adopt the contrarian approach. Also, it may be noted that India is a long term story. Thus, the current environment offers an ideal opportunity to build one's portfolio. However, one has to be really selective during such times. That's because the markets appear dicey when viewed from a top down perspective.
Bottom up approach (short listing companies based on fundamental strength) is more likely to deliver results now. Companies with reasonable valuations and resilient business model are the ones to look out for. And for that the prospective investor should have a reasonable knowledge to act. If not, one should adopt the Systematic Investment Plan (SIP) route, consult a financial planner or invest via mutual funds. Direct exposure to equities can result in erosion of capital. Thus, investors should tread with caution when it comes to deploying their surplus cash.