Indian Equity Markets - Outlook and Stock Recommendation

Equity markets were unsettled during the second quarter as investors faced two challenges: a deflationary crisis in global credit markets and the inflationary thrust of soaring food and energy prices around the world. Neither challenge has been ‘resolved’ and the implications of each are likely to set the tone of financial markets during the second half of the year.

Mounting inflation threatens to complicate an already challenging situation by constraining consumers’ spending power, eroding corporate profit margins and encumbering the operations of the world’s central banks. Pricing pressures should abate as economies slow.

There is every prospect of a period of sluggish economic activity as the end of the ‘cheap money’ era coincides with an escalation in the global prices of energy and food. However, the long suffering investor should persevere. Threats are obvious but, as sentiment in markets deteriorates, changes in economic and financial landscapes are likely to present attractive opportunities for investment.

It is nearing a year we have been asking our investors to book money out from markets and sit on cash (Our Nov'07 article asking investors to book profit from the market: http://profitfromshortterm.blogspot.com/2007/11/what-to-do-this-diwali.html). We are one of the few market analyst who predicted the market fall at the beginning of the credit crisis. Our recommendation portfolio during this period has delivered a positive growth of 2% as compared to a negative 23% return by the sensex. Neyveli Lignite, Orchid Chemicals, Novartis India, Rallis India, TNPL, Chennai Petroleum have been the star portfolio performer beating the sensex return.

Is it a right time to re-enter stock markets?

Further credit market crisis cannot be ruled out and this converging into a full blown recession looks a high probability. Albeit to this with the recent correction seen in Indian markets quiet a good number of stocks looks undervalued. We are advising our investors to sit on partial cash and invest in frontline stocks with a long term outlook. We also have picked five stocks from the small and Mid cap space that has a potential to deliver extra ordinary returns over the course of next 3
years.

Large Cap Picks

1) Mahindra and Mahindra Ltd (CMP Rs. 572/-)
2) Jaiprakash Associates (CMP Rs. 156/-)
3) Indian Oil Corporation -IOC - (CMP Rs. 396/-)
4) Sterlite Industries (CMP Rs. 618/-)
5) HDFC Bank (CMP Rs. 1215/-)

Mid Cap Picks

1) Chennai Petroleum (CMP Rs. 254/-)
2) Ruchi Soya (CMP Rs. 78/-)
3) Shriram Transport (CMP Rs. 335/-)
4) Gujarat Mineral Development Corporation Ltd - GMDC - (CMP Rs. 247/-)
5) Hindustan Construction - HCC - (CMP Rs. 91/-)

Small Cap Picks

1) Abhishek Industries (CMP Rs. 14/-)
2) Tata Metalinks (CMP Rs. 138/-)
3) Novartis India (CMP Rs. 294/-)
4) Deepak Fertilizers (CMP Rs. 91/-)
5) Hitachi Home & Life Solutions (CMP Rs. 110/-)