Take some money off market, sit on cash to pick stocks at fair value

NEW DELHI: After a spike in volatility in the domestic stocks since the Brexit vote, keeping some cash in hand could be the best decision you can make, suggest experts.

“At this stage, it may be sensible to take some money off the table, and stay only with those stories which have long-term growth potential,” Anand Tandon, an independent market expert, told ET Now.

The fear that the shock vote in the UK has instilled in market men is yet to go away despite two days of calmness.

“I think cash becomes the king” in times like this, said Punita Kumar Sinha, Managing Partner at Pacific Paradigm Advisors.

The benchmark indices have lost close to 500 points in the last three sessions since Britain’s historic referendum. The watershed event also raised the fear gauge – India VIX – to its highest level in three months.

The rise in volatility is not the only factor that has Anand Tandon making a case for holding cash.

He argued that valuation of the market, especially the benchmark indices, is fair and they provide little potential for upside at this stage.

As of Tuesday, the Sensex traded at a price-to-earnings, a measure of comparing price to profit, of 19.2, which was above its 10-year historical average of 16-18.

“The market is already trading at an expected earnings growth of maybe around 15 per cent and at 18-19 times earnings. If you take out the energy sector, then the PE is 20 times,” Tandon said, adding, “this is a signal for caution. One has to be a little careful about where one is putting her money.”

Investment banking firm Deutsche Bank has already cut its year-end Sensex target by 7 per cent in the wake of high current valuations and global uncertainties, ET reported on Tuesday.

With valuations high, sanity would suggest that keeping some cash in hand will provide investors with an opportunity to buy stocks at fairer or cheaper valuation as and when the market sees further corrections.

“The frontline index companies will find it difficult to move up because IT is witnessing problems, private sector banks are overpriced, public sector banks have their own set of issues, and most of the metal stocks have already rallied strongly,” said Tandon.

“If the global economy were to slow down, then it is quite likely that commodities will again see some selloff. Therefore, I do not see much upside potential in the benchmark indices,” he said.