3 reasons to buy stocks now as fear unsettles Dalal Street
Experts are advising investors to buy when there is fear in the market instead of sitting on the sidelines.
They cite three reasons to back this thesis.
First, the current volatility in domestic stocks has more to do with external factors than internal.
While there have been concerns about a slowdown in growth in the domestic economy and a slump in consumer demand, India is still ahead of the rest globally in terms of growth momentum. Plus, the slowdown in the economy has more to do with a halt in public spending ahead of the election.
Key equity indices slipped about 4 per cent from their highs hit on April 18 mainly on worries of a spike in crude oil prices and weakness in the rupee, but both have eased ever since.
Nifty dipped nearly 1 per cent on Monday after the US President Donald Trump threatened to impose fresh trade tariffs worth $200 billion on Chinese goods.
Sanjiv Bhasin, Executive Vice-President of IIFL, said the volatility in Indian market has been due to external factors. “I don’t think this will stay long. There are enough people waiting to buy any correction. Extreme high volatility is an opportunity to buy equity as an asset class. We see Nifty at 13,500 and Sensex at 42,000 by December 31. One should buy the fear now.”
On Wednesday, BSE Sensex traded at 38,015 while Nifty was at 11,415.
Secondly, historical data shows market returns have been generally higher in the post-election period than in the pre-election period. At least that was the case in last three instances.
“Nifty has delivered 8 per cent returns year-to-date, and there is ample scope it to see a post-election rally,” says Elara Capital.
During the pre-election rallies in 2009 and 2014, Nifty had climbed 24 per cent and 13 per cent, respectively. In 2004, the index had slipped 9 per cent in the pre-election phase.
In 2004, 2009 and 2014, Nifty jumped 22 per cent, 42 per cent and 16 per cent respectively, after the election outcome.
At a sectoral level, while the pre-election show has been a mixed bag, post-election rallies have been broadbased with positive returns for almost all sectors. Energy in 2014 and telecom in 2009 were the only exceptions.
Thirdly, fear gauge India VIX has risen above the 26 mark from 15 on January 1 this year, making investors nervous. But that, too, is an election-linked syndrome.
Vikas Jain, Senior Research Analyst, Reliance Securities said, “VIX is inching higher ahead of the Lok Sabha election outcome. In last two elections, in 2009 and 2014, VIX has moved from sub-31 levels to 87 and from sub-14 levels to 40 levels, respectively. Still, Nifty surged when the election outcome came in line with market expectations. Along with the rise in the market, VIX came down.”
“This time if the election outcome is in line with market expectation, we may see the market go much higher,” Jain said.
Reliance Securities expects VIX to test the higher range of 40-45 levels. As prices of out-of-the-money Calls and Puts increase, VIX will increase further, it said.