Are stock market valuations attractive now? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Are stock market valuations attractive now? 

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In this issue:
» Inflation heats up in April'12
» Should Europe abandon the Euro?
» Have US regulators missed the bus?
» US dollar is not a safe haven but still hold on to it: Jim Rogers
» ...and more!

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After hitting a year to date high in February 2012, the BSE-Sensex has lost more than 12% value since. There are many reasons behind it. Global worries and weak macroeconomic indicators are some of them. Unfortunately, the signs on these indicators further down the road do not seem very encouraging either. As a result, investors have a big question in their minds. Is this the bottom of the markets can things get worse? Of course the reason they ask this question is to understand if they should invest in the markets now or not.

Morgan Stanley has tried to answer this question. As per a study of theirs that was also reported in a leading daily, the markets seem attractively valued at present. In their study, they have conducted a historic analysis of the price to book value (P/BV) of the Sensex and tried to correlate it to its returns.

As per the results, each time the P/BV of the Sensex dips below 3, the markets have delivered healthy returns in the next 12 months. They have cited 3 such incidents in the past. And they feel that this time too, the Sensex would deliver over 30% returns if the P/BV dips down. The ratio currently stands at 2.98. But Morgan Stanley has stated that the returns would be even better if P/BV were to fall further.

The P/BV is a good valuation multiple to look at while investing. However, there are other things that are equally important to look at while investing. Like any other multiple, P/BV is just an indicator of whether the stock or the market in this case is cheap or not. The bigger question is will the stock deliver returns in the long term or not? The underlying fundamentals answer this question. If fundamentals are strong, then earnings would expand. Such a stock purchased at cheap valuations would help increase shareholders returns. But if fundamentals are poor then no matter what the valuations, things would continue downhill for the stock.

Do you think the stock markets are attractively valued at present? You can also share your comments with us or post your views on our Facebook page / Google+ page.

01:20  Chart of the day
The inflation figures for the month of April were announced recently. Inflation, based on monthly Wholesale Price Index (WPI), stood at 7.2% in April compared to 6.8% in the previous month. Food inflation was also stubborn and stood at 10.4% in April. With inflation showing no signs of cooling down, Reserve Bank of India (RBI) will be relatively cautious in easing the interest rates in the next monetary policy. It may be noted that in the last monetary policy, RBI had surprised the markets with a 50 bps (0.5%) rate cut. And with the industrial production declining in March, there was a consensus of further rate cuts. But considering inflationary pressures, that appears to be a remote possibility now.

It may be noted that food inflation is the main culprit for the rise in overall inflation. And with minimum support prices of crops set to rise further, food inflation may remain in high double digits. Thus, in order to rein in inflation, the problem of food inflation needs to be tackled. And that can be done by improving the back end infrastructure (avoids wastages). Monetary policy tools are ineffective in that regards.

Source: Hindu Business Line
* WPI (Wholesale Price Indiex)

Canada was amongst the few developed countries that emerged relatively unscathed from the 2007-09 financial crises. Thus, it helps to listen to the views of a man who played a significant role in helping Canada escape the pain. He is none other than the country's finance minister, Jim Flaherty. So what is Flaherty's view on the current turmoil in the Euro zone? Well, he believes that it will not be a bad idea to just abandon the whole concept of a common currency.

The other option as per him is to show significant courage and use taxpayers' money to bail the troubled nations out. But the problem with this option is that it is likely to meet with a lot of resistance from taxpayers of the unaffected countries. Also, voters in troubled nations like Greece may reject outright, any call for austerity measures. Thus, as per Flaherty, fixing the problems would be a major political challenge in Europe. And to make matters worse, the whole drama that is underway also has banking consequences which in turn could affect the rest of the world. Quite a pertinent view point from Mr Flaherty we should say.

Has it been caught napping once again? Or is the US Fed pretending to be blissfully unaware of the maladies in large US banks? The massive US$ 2 bn plus trading loss at J P Morgan has brought such questions to the fore again. Since the financial crisis of 2008, J P Morgan bank grew through its takeovers of much of the failed Bear Stearns and Washington Mutual. A lot of water has flown under the bridge since then. However, little seems to have changed when it comes to the big entities' risk taking appetite. In fact the stress test of 2009 that showed encouraging results for US banks' recovery also seems meaningless. For if the entities continue to believe that they are too big to fail, the systemic risks remain as grave as ever. In fact, this seems uncannily similar to our own Air India when the merger of two failed institutions has brought in more pain. Neither the owners nor other stakeholders benefit from the bail out of such miscreants.

The US dollar is far from being a safe haven. The US economy is barely recovering, unemployment still reigns high and consumption is not picking pace at which the US Fed had assumed. Still, the latter insists of curing the economy's ills through reckless money printing. This then means that the value of the dollar is bound to decline. And yet, famed investor Jim Rogers owns the US dollar and believes that it is a good investment bet in the short term. He acknowledges the problems of owning the dollar. But is of the view that since Europe is deep in the doldrums, the US dollar has been gaining in relative terms. The question is how long these gains will sustain. As long as the US Fed continues to address issues in the same manner as it has been doing until now, the dollar is bound to lose value. In such a scenario, gold becomes the best safe haven against paper currencies. True, the precious metal has been witnessing declines in recent times. But that is only because it has been up for 11 years in a row. And so a correction is in due order.

Major software companies reported sluggish growth in their recently declared quarterly results. What was more disappointing was the near term future outlook. Most heavyweights like Infosys and Wipro projected a bleaker outlook for growth. Considering all this, industry experts now doubt the growth projection of 11%-14%, estimated by the industry body Nasscom.

High dependence on the developed world seems to be hurting the Indian IT sector badly. So what should companies in the sector do to de-risk their business? The obvious answer is to look beyond the traditional markets. The companies also need to move beyond their traditional service offering. The demand environment as well as client needs are changing fast. Therefore, the companies need to focus more on services such as consulting, analytics, mobility and cloud computing. Shifting focus from traditional markets and service offerings seem to be way forward for the Indian IT companies.

In the meanwhile, after opening the day in the negative zone, the Indian stock markets are now trading in the green. At the time of writing, BSE Sensex was up by 126 points (0.8%). Stocks in the capital goods and metals space are witnessing maximum gains. The other major Asian stock markets have closed the day on a mixed note with Singapore and Hong Kong closing in green while markets in Japan and Malaysia have closed the day in the red. European markets have opened the day on a positive note.

04:50  Today's Investing mantra
"The greatest long-range investment profits are never obtained by investing in marginal companies. Investors desiring maximum gains over the years had best stay away from low profit-margin or marginal companies." - Philip Fisher
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7 Responses to "Are stock market valuations attractive now?"


May 16, 2012

Start SIP now. In 5 years time you will have good companies at good prices.

Like (1)


May 16, 2012

For new people waiting for entry , it is high alert, they may be trapped,ple..wait for big dip?..

Like (1)

P.Sai Babu

May 16, 2012

Are stock market valuations attractive now?

To this the answer is a small YES & a big NO. The reason for this is the sentiment- FII's on GAAR and domestic investors on policy paralysis- that is playing a major role. This is componded by Euro woes. The economy of western countries seem to be on death knell with recovery at not a visible distance.

Moreover, the U.S economy is being propped up by Fed. and it's full recovery is doubtful.

Taking all the above, the world economy may take a turn to the worst in a couple of years.

Like (1)

Dr HA!

May 15, 2012

Though the market parameter P/BV is tending to become attractive for investing in the stock market, the financial crisis in Europe is not encouraging. Also, in India, the conditions such as inflation,GDP growth, etc are not conducive. Hence the investors should wait for some more time.

Like (1)


May 15, 2012

History does not repeat always. Such co-relation as explained by Morgan Stanley does not take you anywhere. The key is stock selection in right industry. Never in last 50 years, the world has gone through the kind of upheaval which we are now witnessing. Yes market will bottom out some time in future and secular bull trend may start but in immediate future there are many headwinds. Let there be visible sign of bottoming out.

Like (1)

Ramakant Pareek

May 15, 2012

No still I am expecting 40% fall within 8 month time........there will be new government within this time. Wait and watch till than.

Like (1)


May 15, 2012

I cant predict the markets. But if I look at the levels today and am sure that i wouldnt be tracking the prices, then these are good levels. This is a good time to accumulate excellent stocks @ fair valuations (and not fair companies @ excellent valuations). I have already started re-shuffling my portfolio.

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