Markets bounce back 2%. Should investors sell?

Though it is not a good time to exit, analysts say, it is a good time to sell stocks of companies where there is poor earnings visibility

After falling over 6% last week, markets gained ground on Monday with the S&P BSE Sensex and the Nifty 50 index rallying around 2% each. While the S&P BSE Sensex regained 23,000 levels, the Nifty 50 index breezed past the 7,100 mark on the back of supportive global cues.

Most Asian markets moved higher on Monday, with the Nikkei 225 index rallying over 6%. Straits Times, Hang Seng, Taiwan Weighted and KOSPI also moved 1% - 2.5% higher. Shanghai Composite, however, lost 1.6%.

Back home, gains were visible in beaten down metal and banking stocks. Bank Nifty and Nifty Metal indices soared 2.7% and 6.5% in intra-day deals. Pharma, Realty, Infra and FMCG indices on the NSE also gained 2% - 5% in intra-day deals.

 

So what should investors do given the bounce-back?

On a fundamental basis, G. Chokkalingam, founder & managing director, Equinomics Research & Advisory advises that investors stay put at least till the upcoming Union Budget. He suggests investors should not panic and offload the quality stocks, provided 30% of overall wealth is parked in liquid assets.

However, the bounce does provide an opportunity to clean up the portfolio and exit those counters where the results have been sub-par, the company has huge debt on the balance sheet and the earnings growth visibility is less, he says.

"Whilst reiterating our view that there is a high probability that the Sensex will hit 22,000 levels, we point out that there are three factors that can help investors identify the bottom of this bear market: (1) Does the Government have a credible plan to recap the Indian banking sector?; (2) Is system liquidity improving in India?; and (3) Are the Western economies seeing CPI inflation moving up?," points out Saurabh Mukherjea, CEO, Institutional Equities at Ambit Capital in a note.

"At present, what we are seeing on these three fronts does not give us comfort that the bottom is near. Our highest conviction 'buys' in our portfolio are: HCL Technologies, TVS Motors, ITC, HUL, Marico, Berger Paints, Supreme Industries and Titan," he adds.

Bhavin Desai, equity derivatives analyst at Motilal Oswal, on the other hand believes that investors are over-pessimistic right now and he too does not advocates selling at the current levels.

"Selling stocks in current market condition is certainly something we would not advise. On the contrary, one should by stocks that the market activity will support. Some key monitorable factors would be to will look at how many people are willing to take fresh long positions and are willing to take their positions forward from here on; to what extent there is unwinding in beaten down sectors, especially banking, in the futures segment," he says.

Adding: "We have gradually started building positions. However, the trade that is now getting created is not backed by fresh longs. It is a good time to cherry-pick, but investors need to build hedges around so that there is some protection for the trade that has been executed in case of a downside."

As regards the overall sentiment, further crisis in the markets and the banking sector would prove to be a disastrous one unless the RBI and the government take corrective measures, analysts suggest.

"As regards banking, I prefer to invest in banks that have reasonable deposit and credit growth; net non-performing assets of around 2% - 3%; and are still making profit. I would apply these three criterion before investing in the PSU (public sector) banking space. As regards metals, it is a good strategy to use the bounce to exit leveraged companies," he says.