Sensex hits roadblock at higher levels; investors should buy on dips

NEW DELHI: The S&P BSE Sensex plunged over 600 points and the Nifty by over 170 points in trade on Friday, as profit booking intensified at key resistance levels of 30000 on the Sensex and 9000 on the Nifty.

After a strong rally in 2014, both the S&P BSE Sensex and the Nifty managed to rally 8 per cent so far in the year 2015, and some bit of profit booking at higher levels was on the cards, say experts.

The 30-share index finally closed at 29,182.95, down 498.82 points or 1.68 per cent. It touched an all-time high of 29,844.16 and a low of 29,070.48 in trade today.

The S&P BSE Sensex rose as much as 162 points in trade to hit its fresh record high of 29,844.16 in trade on Friday, and the Nifty rose 44 points to hit its lifetime high of 8996.60.

With stock markets hitting fresh highs almost on a daily basis, what should investors do to tackle volatility? Should they keep accumulating stocks on dips or book profit on rallies?

There is no denying the fact that volatility will increase in the markets going forward. However, analysts across Dalal Street are of the view that investors need not worry about them, and use dips to accumulate quality stocks at lower levels as there is more steam left in the markets.

"We continue to advice our clients to use every opportunity and especially the volatility which come along the way to invest into the markets. Over the last couple of months we have seen decent inflows and we have also been continuously deploying our strategies to sit 100% invested," says Taher Badshah of Motilal Oswal AMC.

Foreign institutional investors have been consistent in accumulating stocks in the Indian markets so far in the month of January. And the trend is likely to continue in future as well, say analysts.

FIIs have bought shares worth Rs 5,992 crore (USD 977 million) till January 23, while bought debt worth 15,336 crore (USD 2.5 billion) taking the total investment to Rs 21,328 crore (USD 3.45 billion), latest data with Central Depository Services Ltd (CDSL) showed.

The pre-budget rally, which is already in progress, will strengthen going forward and push the Sensex and the Nifty to a fresh record high. The Sensex may hit levels around 33k and the Nifty should be able to break through its crucial psychological resistance level of 9k, and hit 9300 ahead of the Budget 2015, says experts.

But the rally would not be as steep as was seen in 2014, caution experts. Markets could at best deliver 15-20 per cent return in 2015, but there would be a lot of action in individual stocks. So, investors should look at accumulating quality stocks on every decline.

"For the last several months we have been working with a Sensex target of 30000, and now we are almost there, but for the long term investor our FY16-end Sensex target stands at about 36000," says Gaurav Mehta, VP, Institutional Equities, Ambit Capital.

"So, over the next 12 to 15 months we should expect another 20% return from the market as a whole. For the long term investor, it does not look likes anything to be very concerned about, but from a trader's point of view, the market looks like nearing some resistance of sorts,” he adds.

The Reserve Bank of India (RBI) has already begun the rate cut cycle, but there is plenty of headroom for further cuts going forward, which would help in boosting growth and reviving the investment cycle in Asia's third largest economy.

India remains in a sweet spot as the macro-economic environment is expected to improve further, which will drive earnings and the Sensex higher in the near future.

"At a time when global growth projections have been curtailed, India seems to be in a sweet spot as tailwinds from falling commodity prices, especially the crude price correction, have been indirectly offering us a stimulus of almost $50 billion," says Mahesh Patil, Co-CIO, Birla Sun Life MF.

"Market valuations seem reasonable at current levels, and it will be a bottom up story. But what has happened in the beginning of this year is that we have seen rate cuts, which have helped the market move further higher," he adds.

In the near term, 9000 on the Nifty or 30000 or thereabouts on the Sensex are going to be crucial psychological resistances. But that said, if your holding horizons are a little longer than 12 to 15 months, then this market looks good for another 20% from here on, adds Mehta.

"We might expect that the markets will track earnings growth, which is likely to be about 18% to 20% over the next couple of years," says Dhiraj Sachdev, Sr VP & Fund Manager-Equities, HSBC AM.

"So, our sense is that 18% to 20% is a reasonable kind of earnings growth that can be expected from next year onwards because of the fall in interest rates and the fall in raw material prices etc.," he adds.

“But caution would be well advised,” says Dipen Sheth, Head - Institutional Research, HDFC Securities.

"The challenge for a smart investor is to think ahead of market consensus. So the money is coming in. India is the place to be in and you do not have to differ with the consensus," he says.

“The tail risks that I am worried about going forward is that corporate performances actually do not catch up and substantially lag the expectations that people have built in for FY16,” he adds.