Time to enter the market

Though the market is likely remain volatile due to global and domestic uncertainties, investors can consider entering the market gradually as the valuations have started becoming reasonable.

The stock market mood has changed dramatically again and the Sensex has lost more than 2,000 points in less than a month, taking it to a new two-year low. More importantly, the current Sensex value of 15,858 is significantly lower than 19,248 four years ago, which means investors have lost 18% even after a decent holding period. The wealth destruction in the midand small-cap counters in the past month has been worse and several stocks from these segments have fallen by over 50%. With this, more stocks have fallen below the 2008-9 lows, when the Sensex was quoting at 7,700 levels, increasing the gloom among retail investors. 

Attractive valuations 
Amid this dismay, there is a silver lining. The trailing 12-months PE of the Sensex has entered the 'slightly undervalued zone' after a gap of 30 months. Though it's a difficult task, stock market investing is all about buying when it's cheap and selling when it's expensive. So the time has come for the smart players to get back to the market. As is evident from the chart (Sensex trailing EPS), the investors who start accumulating from these levels can reap a good return in the next 3-4 years. 
    However, the valuations have not yet reached the bear market bottoms, that is when the Sensex PE goes below 12, marked as 'grossly undervalued zone' in the chart. So, you should be able to withstand heavy volatility in the middle. In other words, don't expect any risk-free returns. Staggering your investment is one way to reduce volatility. "The market may bottom out in the next 3-6 months, so people should consider 2 4 6 investing in a staggered manner," says Prasun Gajri, CIO, HDFC Life. To increase efficiency, you can hike the frequency of investing, say, from monthly to weekly. More savvy investors can take the help of futures and options to wade through this difficult period. "The turbulence may continue for some more time and the investors who enter the market now need to protect themselves by going for put options," says Swapnil Pawar, CIO, Karvy Private Wealth. Since the market is in a downward mode, you can also wait a little longer for better valuations. "If the current decline takes the Sensex to around 14,500 levels, long-term investors with a 3-4-year time frame can consider getting in because the forward PE will touch 12," says Anand Tandon, CEO, JRG Group. 
    Since the impending volatility will be triggered by several global and domestic events, investors should be ready to modify their strategies based on how these play out. Let us consider these. 
Global factors 
Though the US and Europe face the risk of a recession, the market is more worried about the possible sovereign default or break-up of the Euro zone because its impact will be catastrophic. As of now, no immediate solution is in sight. Though a common Euro zone bond has been suggested as one, it may not come through due to Germany's opposition. In fact, if Germany doesn't back up with unconventional methods like common bonds, the euro may collapse, but supporting these measures will amount to transferring liabilities to Germany and affecting its credit rating. So the best scenario involves a continued postponement of the default, hoping that time will solve the problem. 
Rupee depreciation 
The fall in rupee is another worry for the Indian investors (see page 12). However, the sudden deprecation has had a positive impact. "The rupee fall was very fast and the FIIs did not get enough time to get out, otherwise the outflow would have been much more," says Chokkalingam C, Group CIO, Centrum Wealth. This explains why the FII withdrawal is relatively low compared to the massive $10 billion outflow during the rupee depreciation in 2008 which lasted 7 months. So the FII outflow may not be too high because the market is already down 22% and rupee has fallen by 18%, and FIIs don't have much option but to remain invested. 
Interest rate cycle 
Though the sudden depreciation in rupee will increase the inflationary pressure and may force the RBI to continue with a tight monetary policy for some more time, experts are hopeful that we are already at the peak of the cycle. "The RBI is expected to start liquidity measures like reduction in CRR from March and rate cuts from June,"