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One of the best stock buying opportunities in 20 years!

May 26, 2012

In this issue:
» Why manufacturing is essential for services growth?
» Smooth land acquisition for rail corridor
» The golden lining in petrol prices for pvt fuel retailers
» The risks to US from Greek exit
» ...and more!

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00:00
 
"Remember God in good times and equities in bad times". Such sagely advice rarely comes from equity market veterans. But when they do and especially from the likes of Prashant Jain of HDFC Mutual Fund we certainly are all ears. Jain not just has a commendable track record in managing some of the largest assets under management (AUM) in Indian mutual fund industry. He is also known to share some of his wisdom on stock investing on and off with retail investors. After all that is the trait of some of the most respected value investing geniuses. But the note that he wrote recently is not just about theoretical wisdom. It is also backed by some powerful and convincing data. One that can leave retail investors in no doubt as to why this is one of the best times to invest in Indian equities.

Probably it would suffice to say that the opportunity that Indian equity markets present now has come only three times earlier in the last 20 years. The common factors between now and then were challenging economic environment, poor market sentiments and low valuations. The first instance was when Sensex crashed to 2900 levels in October 2001 after the 9/11 attacks on WTC. The Sensex was then trading at 1 year forward PE multiple of 11 times and went on to return 334% in 5 years. The second instance was June 2004 where markets got hammered after the surprising outcome of election results. The Sensex was then trading at 1 year forward PE multiple of 10 times and went on to return 99% in 5 years. The most recent one as we all know was the post subprime crisis period in Novermber 2008. Once again investments in Sensex trading a 1 year forward multiple of 11 times yielded returns of 77% in 3 years. Therefore, that currently 1 year forward PE multiple for the Sensex is around 13 times and 2 year forward multiple is at a historical low of 11 times certainly suggests something!

More importantly, despite the warning cited by global banks and rating agencies, very little has changed in India's long term economic outlook. India's nominal GDP growth (real growth + inflation) has averaged at 14% per annum since 1979. Over the last 3 years the same has been 16% per annum. It is therefore hardly surprising that the Sensex has yielded average annual returns of 15% since 1979 (inception) till date. Nothing suggests that Sensex will not repeat this performance over the next decade. That too, despite some short term economic hiccups. After all the theory of reversal to mean is here to stay. And stock market valuations will have to oblige.

Thus negative market sentiments can offer some of the most lucrative opportunities to long term investors in Indian equities. The method is simple. Choose fundamentally robust companies with trustworthy managements. And do keep your return expectations realistic. With that, you are unlikely to come across too many disappointments.

Do you think this is one of the best times to invest in Indian equities for the long term? Let us know your comments or post them on our our Facebook page / Google+ page.

01:20
 Chart of the day
 
Despite the lure of the shiny metal, statistics show that gold has outperformed returns from equities over a 5 year period only once in the past 3 decades. Hence, while gold should have a well deserved place in the long term portfolio for its inflation hedging properties, one cannot deny the importance of equities, which depending upon one's risk appetite must be a much larger proportion.

Data source: HDFC Mutual Fund

01:45
 
It seems that the whole nation has taken its knives out in response to the Government's decision to hike petrol prices. But for a handful of firms out there, the hike is a welcome opportunity. These are none other than private fuel retailers. If one of these firms is to be believed, the move has given them a chance to re-open around 300-400 of their fuel retailing outlets across the country. Soon, other private retailers may also follow suit. It should however be noted that despite the hike, these companies are unlikely to make any profits. The rise would cover only the costs at best.

Is this a harbinger of good times to come for the private retailers? We don't think so. Any further depreciation in the rupee and we would be back to square one if the Government decides not to pass on the burden. Till such time the fuel prices are permanently deregulated, retailers will have to live in fear of making losses in their operations. Thus, even the current window of opportunity may not last that long we reckon.

02:15
 
The railways seem to have got an express pass for land acquisition for the Dedicated Freight Corridor Corporation (DFCC). This is while infra projects across the country are in limbo because of land woes and policy paralysis. Over the past three years, it has already acquired 70% of the 10,000 hectares required. Quicker land clearance was one of the preconditions for this project getting funds from the World Bank and JICA. The important milestone of 70% has been breached. But, even acquiring a small patch of land can sometimes take years. However, since the big pocket financiers and the government seem to be taking this corridor seriously, the ambitious project may be very much on the right track.

02:49
 
Before the world turned topsy-turvy after the 2008 financial crisis, globalisation was a very fancy term. It was said that the integration of the world economy would help better allocation of resources, greater productivity and create a level playing field for all economies. Of course, this is indeed true. But this is not the entire truth. Because greater integration also brings with it hoards of problems which may have origin several thousand miles away. This exposes economies to huge external risks.

Take for instance the US economy. There is no denying that the economy is in a mess on account of its own wrongdoings. But it is also seriously vulnerable, both directly and indirectly, to the crisis that's playing out in the Euro zone. By directly, we mean in the form of exports. The European Union accounts for about 19% of US exports, while the same from the Euro zone alone accounts for about 13%. But the indirect adverse effects of the euro crisis on the US are even more pronounced. Europe is a major trading partner for US and accounts for about 25% of global trade. Anemic economic growth in the Euro zone is likely to affect global growth which in turn would have a ripple effect on the US. The other indirect adverse effects are through the financial sector. If Greece left the euro currency, for the short term at least, it would wreck havoc in the markets. So the internal and external risks to the US economy are immense.

03:20
 
Industrial production in India has been battered in recent times. With the economy slowing down, the impact of this has been more visible in the manufacturing sector. Thus, it is hardly surprising if job growth in this field also slows down. The European crisis also did its bit in putting brakes on job growth especially in the latter half of 2011. Despite such a weak scenario, the job market is expected to bounce back this year. This would largely be led by the services sector which contributes around 59% to the country's GDP. In calendar year 2011, around 1.4 m jobs were generated across the 13 sectors. And most of this job generation was seen in the healthcare, hospitality and IT/ITES fields. Thus, growth in the services sector is bound to have a positive impact on the overall job market in India. Having said that, in the longer term, for services to thrive, growth in manufacturing becomes essential. Which is why the government cannot neglect industrial growth. It needs to focus more on ramping up infrastructure in this space by manufacturing zones, industrial townships, and industrial hubs across the country to help the sector create more jobs.

04:05
 
Global investors spent the week in anticipation about the probable exit of Greece from the eurozone but still managed to end the week in the green. Barring Asian stocks, all stock markets ended on a positive note. Some statistics regarding the US economy will be released next week and the investors will continue to be concerned about Eurozone too. This is likely to set the mood of investors over coming weeks until Greece holds elections on June 17.

In India, news that made headlines throughout the week was hike in petrol prices by Rs 7.5 per litre. However, this did not hurt investor sentiments much. Also, sharp fall in the value of rupee was a concern but Indian equity markets finally closed the week 0.4% higher.

Amongst, the other world markets, Asian stock markets were down on slowing down of Chinese economy and concerns that China's biggest bank may fall short of loan targets for the first time in last 7 years. All other stock markets closed on a positive note with UK being the top gainer.

Data source: Yahoo, Kitco

04:50
 Weekend investing mantra
"It is natural to assume that industries which have fared worse than the average are "unfavorably situated" and therefore to be avoided. The converse would be assumed, of course, for those with superior records. But this conclusion may often prove quite erroneous. Abnormally good or abnormally bad conditions do not last forever. This is true not only of general business but of particular industries as well. Corrective forces are often set in motion which tend to restore profits where they have disappeared, or to reduce them where they are excessive in relation to capital" - Benjamin Graham

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8 Responses to "One of the best stock buying opportunities in 20 years!"

lambodar borah

Sep 2, 2012

Average 5% to 7% profit can be expected from your scrips in one year period.

Like (1)

SAppadurai

Jun 23, 2012

TCS

Like (2)

karunan

Jun 8, 2012

I would like to know the best stock buying opportunities
in 20 years

Like (4)

Sanjeev

Jun 1, 2012

I would like to know about "One of the best stock buying opportunities in 20 years!"

Like (10)

Kuldeep

May 26, 2012

Where is the money? Retail investors are reeling under the daily price rise of their daily needs. Taxes galore in form of income, sales, excise, octroi, professional, and service taxes. On top of that corruption, eats away everything else. And then invest in stocks or mutual funds who from time to time fall like an avalanche because of some scam or the other. MF's are also in the business to take away their clients' money. No wonder, they buy gold and not stocks.

Like (4)

nneelakantansankaran

May 26, 2012

really your informations are very fruitful which benifits the viewers a lot. thank you

Like (1)

Agnel Pereira

May 26, 2012

First of all, there is one small error in the piece, the 9/11 was in 2001, not 2011.
Well, I do believe in long term theory, but it is still not the best times to enter, as I feel a P/E of 10 is still a possibility this time around. The main reason is the India specific policy uncertainty coupled with prolonged global mess, none of which was a major issue in 2001 (non-Indian problem on internal security) or 2004 (election results, knee jerk reaction) or 2008 (global economic woes, but Indian strengths). The current mess in India is a combined effect of poor politics (wide spread corruption at high levels), sloppy policies (including uncontrolled inflation, week currency, poor foreign investor policies) and global (including Chinese and Australian bubbles) economic issues. I feel 2014 could turn India around with a revolutionary change in political scenario and by then, the bubbles in some countries would have burst, thereby re-energising the economies.

Like (2)

N K Jain

May 26, 2012

The above analysis amply suggests that good time for investment is when everybody starts crying in the stock market. The above article should also supplement the present state of affairs with dividend yield. When PEs are low dividend yields should be high. In case of Indian market any thing above 2% is another positive signal for investment.

Like (2)
  
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