Market correction: An opportunity to buy for long term

Stock markets world over are being driven by excess liquidity, but the valuations seem to have been stretched too far at this point in time. But based on fundamental analysis, the 'Margin of Safety' for a large number of stocks, especially the front line stocks, is under threat. Is it the time to buy for long term? Serious long term investors can wait for markets to correct around 10-15% from current levels to buy for long term.

Incidentally, market participants have a tendency to factor in the good news immediately. The good news about a possible revival of World economy by early next year, good set of quarterly results, have already been factored into the stock prices. But the markets may still continue to rise in the short term because of the comfortable liquidity position. However, markets tend to ignore the negative news for a great length of time. 'Behavioral Finance' would tell us that people tend to be in a denial mode for long before bad news actually catches with them. Remember, the signals for an impending global crises were ignored by the markets in the early part of 2007, when the sub prime crises broke out in the US. The after effects and the magnitude of the crises are known to all of us now.

At this juncture Indian markets are ignoring 2 important factors which may have far reaching impact on Indian economy:

• Failure of Monsoon: It is almost certain now that we are heading towards a deficient monsoon year (the worst in past 8 years). The impact of this could lead to a decline of GDP by 0.5-1%, depending on the distribution of the rainfall in the remaining part of the monsoon season. The 'El Nino' factor could worsen things further. rural demand may suffer, which is bad news for FMCG and Auto companies.
• Spread of Swine Flu: The speed with which the cases of Swine flu are being reported is likely to create a panic like situation. Some sectors like Hotels and Aviation would become the necessary victims of the spread of swine flu.

We continue to be in a denial mode about the likely impact of these two events. However, whenever reality dawns on the markets, they will correct substantially from the current levels. That would be a great buying opportunity for long term (long term means a holding period over at least 2-3 years).