I am not able to understand why our market is falling down. Our market started falling because of the recession in the U.S. But the U.S. market went up even after Bear Stearn went bankrupt and the FED cut interest rates, but our market did not respond. Please explain to me.R.Batra,Mumbai. JATIN Replies:
The US market is facing a major crisis in the housing sector. This has resulted in many bad loans and thus the sub prime crisis is deepening. Bear Stearn is a result of this subprime crisis fallout. Since US market is the mother of all equity markets, the effect will definitely be felt throughout. But our market has entered a bear phase and hence every rise is a bear rally and is used to short. In bear market the valuations appear more and more attractive, but the prices will not sustain and will fall down. So inspite of the 75 bps rate cut, our market was not able to sustain at higher levels. For the first time in five years, we are experiencing a bear market. So even after the FED cut interest rates in the US, our market went up but in the end gave up majority of the gains. This is the fickle nature of bear market.
Thanks for writing in,
Dear Jatin Sir,
I find your advice always valuable, please guide me. Since large caps are falling too, is it wise to invest in large caps or should we buy low PE midcaps. Suggest some good stocks.Shashi Sethia,Valsad. JATIN Replies:
Hello Mr. Shethia,
Its nice to know that you have been following my articles in Valsad. A falling market is like a house on fire, where some things take longer time to burn than others. It is somewhat like that, in a bear market, everything looks like a value buy, but the prices keep on declining. Generally markets bottom out and then there is long period of sideways consolidation and then the prices started moving up slowly.
One thing to keep in mind is that PE Ratio is one of the most basic tool, generally a higher PE ratio is assigned to a growth stock, where future outlook is bright. But when the market enters a bear phase, the growth stocks fall the most. So I advise you to look at other ratios also and some other fundamental indicators as well.
As and when the market rebounds the large caps are the first to move off the blocks and then the rally will percolate to the midcaps and then to the small caps. I feel you should start investing in large caps like HLL, Ranbaxy, Reliance Ind, L&T which have good upside potential from this level. As far as midcaps are concerned, I feel the PSU banks are the ones who have suffered because of the collapse of their counterparts in the US. Thus mid size PSU banks like Bank Of India, Union Bank of India and Bank of Baroda, which are almost trading near their book values, offer good upside potential over a one year horizon.
Thanks and happy investing,
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