Why stock market appetite is at 7 year low... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Why stock market appetite is at 7 year low... 

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In this issue:
» Who will bail out the rupee?
» What is the gold to silver ratio saying these days?
» Sectoral PE multiples touch their peaks
» PSU banks getting penalized
» ...and more!

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"Are stock market valuations attractive now?" We asked this to the readers of The 5 Minute Wrapup yesterday. Had we put this question to you in 2008, undoubtedly the answers would have been very different. But over the last four years, the investment scenario as well as the sentiments of retail investors has changed a lot. Newspapers bombard us with depressing economic data day in and day out. This is something they did in 2008 as well. But the difference is that now most of the data pertains to the domestic economy rather than the West. Failure of five-year plans, policy inaction, huge deficits, corruption, government bailouts have all played their part. As a result retail investors in Indian equities are a wary lot. As it is, investments in Indian stocks as a percentage of total household investments have not gone beyond low single digits in the past decade. But with concerns on the medium term outlook clouding sentiments, retail participation has truncated to a seven-year low!

The debate over stocks versus bonds has also resumed thanks to competitive yields from the latter. Investors find it easier to park money in low risk bonds yielding 8.5% per annum. Especially since stock markets assure no such returns in the medium term. Even the lure of investing at discounted valuations seems to have lost its appeal. Retail investors seem to prefer safety of capital over exposure to risky assets. Ones that have slightly higher risk appetite and long term horizon are also at times unnerved when economic concerns seem too tough to handle. Moreover, ones who were invested earlier seem rather keen to book profits or cut losses than wait for the dust to settle down. Hence low valuations are certainly not a consolation for investors these days.

But we believe that the logic of staying away from stock markets due to macro risks could not be further from truth. No doubt one needs to ensure sound and resilient fundamentals for the stocks that they are investing into. Looking at valuations alone could fool you into buying the wrong stocks. But getting swayed by macro risks or trying to time the market can prove as damaging to your portfolio. Further, whether or not you invest in some stocks, it is necessary to have well researched opinion on them. For you never know when they turn out to be the perfect fit for your portfolio. Hence we believe that the time is ripe for retail investors to shed their inhibitions about stock investing. A tested and disciplined approach to stock investing could make the 8.5% low risk bond almost redundant in your portfolio.

Do you think retail investors should stay away from stocks or invest in safe stocks at the current levels? Let us know your comments or post them on our Facebook page / Google+ page.

01:20  Chart of the day
The economies of scale in global manufacturing have certainly tilted away from China. If the data from manufacturing index cited by Economist is anything to go by, China is all set to match the cost of manufacturing in the US by 2015. Not the input costs but the spiraling labour cost in China is expected to cause this change of dynamics. All the more better for India that is hoping to recoup some lost ground in the manufacturing space.

Data source: Economist

With assets across the world falling like nine pins, how can our very own rupee be far behind? It was no surprise then it has hit a new all time low of 54.32 per US dollar, crossing its previous low of 54.30 achieved in December last year. Thus, the big question is whether anything can be done to stem the slide. Nothing meaningful we believe as far as the short term is concerned. And even the central bank seems to have given up on this. But not before spending a whopping US$ 20 bn between September and now.

Finally though the reality that they are trying to treat the symptoms and not the disease seems to have dawned upon them. The onus of improving rupee's position lies with the Government we believe. Their policy making or the lack of it and reckless spending are the key reasons behind the rupee's current plight. And unless some strong action is seen on these fronts, the Indian currency may continue to hit new lows with constant regularity.

Silver is not as much in the news these days as its other precious metal counterpart gold. The main reason could be its relative underperformance vis-a-vis gold. However, if a leading expert is to be believed, the trend could well reverse in the coming months. As per Daily Crux, the gold/silver ratio is approaching a historically significant number of 58x-60x.

More often than not, silver has been found to outperform gold whenever the latter has become around 60 times more expensive than the former. Thus, if the past trend is any indication, silver may outperform in the coming months. But if the psychologically important barrier of 60 is crossed, then it is likely to be a one way ride for gold, taking the ratio as high as 90 x.

Frankly speaking, we do not subscribe to this technical school of thought. For us, gold is a hedge against global uncertainty. And as long as that uncertainty prevails, it is not a bad idea to make it around 10%-15% of one's portfolio.

The Indian equity markets have borne the brunt of the weak macro-economic environment over the last year. The BSE Sensex was the worst performing global index registering a drop of 23% in 2011. According to Securities And Exchange Board Of India (SEBI), FII's pulled out US$ 4.9 bn from the Indian markets during the year which was much higher than the outflows from other BRIC nations. This benefitted smaller south-east Asian countries particularly Indonesia as reflected in the 3% gain recorded by the Jakarta Composite index in 2011. With Indonesia's GDP expected to grow by a robust 6-7% in future and on the back of its low current account deficit, both Fitch and Moody's upgraded Indonesia to investment grade recently. In contrast, India's credit rating was downgraded to negative by Standard and Poor's.

Even as Reserve Bank of India (RBI) has embarked on a softening interest regime in FY12, India's share of problems seems to be far from over. The continued paralysis of economic reforms and sharp rupee depreciation has further compounded problems. India's fiscal deficit is being projected to swell to 5.1% of GDP in FY13, much higher than the fiscal deficit of its other BRIC counterparts. But despite the headwinds, India can still boast of a services driven economy as compared to Indonesia where commodities rule the roost. Hence, we believe that it may be quite some time before Indonesia replaces India in the BRICs.

For years, Indian stock markets have always had a darling sector in which investors wanted to invest their money. This was evident during both the bull rally leading up to the financial crisis of 2008 or during the gloom days of 2009. However, this is the first time in many years that the market is divided over which sector will outperform. This is evident from the divergence in the price earning (P/E) multiples of various sector indices. Investors have long considered P/E a useful metric for evaluating the relative attractiveness of a company's stock price. P/E ratios of power, capital goods and banking sector are almost at lows of 2009. This indicates that valuations of these sectors have reached the level of the crisis time and cannot go much worse from here.

However P/E ratios of some sectors like healthcare have reached three year high. A correction is also possible in metals where the sector P/E is much higher than when demand for metals had declined. A similar situation applies to IT sector as well. This is because the Indian IT sector is facing tough challenges due to the global uncertainty. Thus, with such divergent P/E ratios, it will be difficult for investors for pick an outperforming sector to invest in.

History has enough examples to suggest that Government interference in managing public sector units has not paid well. Be it Coal India or state run oil marketing companies, the political interests end up hurting the economic interests. If one takes a stock of recent events, we seem to be taking no lessons from the past.

This time, the PSU banks are being penalized for being majorly owned by the Government. The latter, that is meant to take policy decisions is now dictating the day to day operations and hurting the commercial interests of these banks. Because of such meddling, the PSU banks are already in trouble due to over exposure to loss making state electricity boards and airlines. Needless to say, if things go worse, the Government is in no position to compensate these banks by infusing more capital. It is time the Government minds its limits and let PSU banks run as listed entities with commercial interests rather than as charitable entities!

Taking cues from their peers across Asian markets, the indices in Indian stock markets opened lower and continued to languish in the negative territory for the rest of the session. At the time of writing, the BSE Sensex was trading 260 points below the dotted line. The indices in most other Asian markets closed lower in today's trade. Those in Europe have also opened in the red.

04:50  Today's Investing mantra
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    Equitymaster requests your view! Post a comment on "Why stock market appetite is at 7 year low...". Click here!

    2 Responses to "Why stock market appetite is at 7 year low..."

    P.Sai Babu

    May 16, 2012

    Why people should invest in stock market when the returns are in -ve side for almost 2 years in a row? Instead invest in bank Fixed deposit where you get an assured double digit interest rate at almost 10 to 10.5% without any risk.

    As you mentioned the reasons for the low appetite towards stock market are Failure of five-year plans, policy inaction, huge deficits, corruption, government bailouts. As a result retail investors in Indian equities are a wary lot. As it is, investments in Indian stocks as a percentage of total household investments have not gone beyond low single digits in the past decade which will further go down.

    There is a need to correct the in equality in the investment pattern where at present FII's play a dominant role and are dictating the direction of the market. This needs a relook at the way FII's are allowed to invest in the stock market.
    The controls include
    1) Limiting their percentage of investment in any Indian company.
    2) They should not allowed to do short term trading
    3) They should be barred from investing in derivatives

    With curbs as above we may face a short term pinch, but the health of Stock markets in the long run will certainly on the rise.

    Like (1)

    Ragini Ghanekar

    May 16, 2012

    I want to comment on government meddling in PSUs. We should start a campaign against it on behalf of minority shareholders on various platform to such an extent that government will not dare to dictate in the running of these companies and allow it to be run as commercial enterprise with moral and principled approach.

    Like (1)
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