When the Indian stock markets hit record highs in the first few days of November, while there was expected euphoria, there was also some concern raised about whether the rally would be sustainable in what is still an uncertain economic environment, especially in the context of run up to the general election in 2014. And so, for those who missed the ride and profits which came with it as well as for the ones who are still invested, what are the opportunities, if any, going ahead?

Propelled by a big surge in foreign capital inflow, the markets have seen a remarkable turnaround in the last two months, though in the last couple of weeks, they have been volatile and witnessed a few days of declines.

Not unduly worried by the volatility, analysts point to a few market indicators, which suggest that there is still a margin of safety to invest in Indian equities over the medium to longer term.

In the context of the rally, while indices are closer to the all time highs, the valuations are no where near their highs. Currently, for example, the Sensex has a P/E (price to earnings) ratio, which is close to 17 times on forward earnings. In good times, it has traded in the high 20s.

If the markets were to trade at the higher end of valuations, it will be at least 30 per cent more than at today’s levels, given the current earnings, said Anand Radhakrishnan, head of equities and portfolio manager at Franklin Templeton Asset Management (India) Private Ltd.

“In essence what we are seeing is that the market is not expensive,” he said. “I don’t see any big risk of the market going down drastically as there is a reasonable valuation support.”

Anil Rego, chief executive of financial advisory firm Right Horizons, based in Bengaluru, points out that the P/E ratio of the Nifty was around 28 times in January 2008 near the market high, went down to 11 times in October of that year at the market bottom and even when it crossed the all-time high, it was around 17.5 times.

“Thus some one with a medium to long-term perspective can see good returns,” Rego said. “Between now and the next six to 12 months would be a good time to invest into Indian equity.”

Also, if one were to look at inflation adjusted index, Sensex would be around 13,000 rather than the current 20,000-something levels. And if one looks at a one-year perspective, a few stocks have done well and these stocks have significant weights in the index.

“This is clearly brought out by the variation between Sensex and Midcap Indices,” said Rego. “While the Sensex moved up by 10.29%, the CNX Nifty Midcap index fell by 6.2%. This clearly brings out the fact that the rally has not been broad based.”

While it is true that year-to-date comparative of the indices, the broad market (in this case, Sensex) has delivered only about six per cent return.

However as Krishnan Ramachandran, chief executive of Barjeel Geojit Securities, Dubai, points out that the reference point of the overall yearly rally should be the lows that the market witnessed across all its segments in August this year. This was when the Indian Rupee reached its nadir, unsettling investors’ sentiments. Added to this was the news of the US tapering.

The hope is the rally will be more broad based in the coming months and some of it is already being seen.

The economy has started showing marginal improvement and few of the sectors have started gaining momentum, said Rego.

“Though the Year-on-Year figures for these sectors continue to be still weak; however, their Quarter on Quarter numbers reported improvements,” he added. “In our opinion, in the short term, there could be continued volatility, but if one has a two- to three- year perspective, then we expect markets to go higher. The ideal strategy in our view is to phase in investment over the next six to 12 months.”

If one is an index agnostic investor and looking to do bottom-up stock picking and constructing a portfolio, it is well possible to construct a value oriented portfolio, said Radhakrishnan.

“At cheap valuations, one can avoid certain expensive stocks at this point of time,” he said.

Sector outlook

Once some optimism comes back to the economy and the market, some of the stocks would underperform and the cyclical stocks would outperform, Radhakrishnan added.

“I think that’s where the opportunity lies for the investors. The top heavy stocks people have moved up for a reason. The way I see, it is the breadth is increasing.

“Initially the consumer staples and IT (information technology) stocks were the only ones doing well. Healthcare stocks have joined them. Telecom stocks are relatively doing better.

“I also see stocks from other sectors such as cement and media joining these in terms of performance. Over time I do see an opportunity for the market movement to become broad-based. The dependents on few stocks will come down over the next six months to one year.”

While he desists from giving specific stock recommendations, he sees the fundamentals of couple of sectors interesting in the current scenario. One is telecom, where the sector is coming out of an intensive competitive phase to a more benign one, with many of the competitors losing lots of money, and the other, cement, the structural demand of which is expected to recover slowly.

According to Barjeel’s Ramachandran, the predominant rally of shares has been in the IT, healthcare, FMCG (fast moving consumer durables) and auto sectors. The oil and gas sector has been more or less neutral.

The emerging investment sectors, he added, now include metals, capital goods, banking, consumer durables and some public sector units. The real estate sector is however not showing any signs of revival to induce investor sentiment.

While Franklin Templeton’s Radhakrishnan had a note of caution on some sectors that have suffered and continue to do so, he however said that they could indeed be offering opportunities, depending on what phase of the cycle they are in.

“We won’t be surprised that most of the worst case scenarios, more or less, have been factored into some of these sectors like banking, capital growth or infrastructure,” he said.

“Having said that, we also appreciate that it is tough to invest in a sector blindfolded, with no semblance of positive news coming out. It is also tough to make sense of it and put lot of money behind it.

“But I do think that serious value investors tend to invest in some of these when the bad news is at its peak or closer to its peak and then wait for good news to happen. So there are different approaches to investing. It depends on what investment style suits an investor, and the kind of certainty they want in their outcomes,” Radhakrishnan noted.

He advises that investors should not be focusing too much on a lot of macroeconomic data such as inflation, interest rates, deficits and currency stability.

“It is cliché but I will repeat: from a top down, India never looks so attractive, but on a bottom up basis, there are so many good companies, which are manufacturing, marketing, delivering services and products consistently over a period of time and also have very large profitable franchises, which I think one should invest in. So do not overemphasize macroeconomic data point.”