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Growth prospects the focus - Views on News from Equitymaster
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  • Jan 15, 2004

    Growth prospects the focus

    After a huge run-up in the last one-year, BSE-Sensex closed at an all time high of 6,194 points, registering a gain of more than 80% since January 2003. The rally has been witnessed across the stocks in the market as BSE-500 gained around 110% over the last 12 months. Looking at the huge returns given by the markets, retail investors are lured to invest in equities. It seems that all of a sudden equities have become the most favorite asset class to invest your money in. However, at the current juncture, stock selection would not be easy as it would have been 6 months back. As, such, one needs to be very clear regarding his rationale behind investing into equity markets at the current juncture.

    In this backdrop, we conducted a poll on our website asking investors whether at the current juncture, their investment decision in equities would be based on - cheap valuations, positive market sentiment, or strong prospects of the companies. It is encouraging to know that about 54% of the audience would invest in markets looking at the growth prospects of companies, whereas 23% are of the view that markets are still under-valued. The rest (23%) would put their bet on the markets based on positive market sentiment.

    As far as valuations are concerned, at the current juncture, we feel that markets are being too optimistic. Almost all stocks across sectors are currently trading at the higher end of the valuation spectrum. However, comparing valuations bluntly would not depict the true picture, as the Indian economy is on a path towards higher growth. So, the growth prospects for the companies are higher as compared to other international giants that are operating in the developed economies. Hence, it becomes an imperative to consider the fundamentals of companies before arriving at a fair assessment of valuations.

    As far as the growth prospects for Indian companies are concerned, the potential is promising. The per-capita consumption of power, steel, aluminium and cement in India is amongst the lowest levels as compared to other countries. Hence, as the economy grows, the consumption is likely to increase. And this will help companies to grow at a faster rate. Moreover, with the government's thrust on infrastructure development, growth prospects of the utility sector over a five year period looks promising, albeit with challenges. It will definitely take time for the above said things to filter into higher profitability.

    However, we feel that investing on the basis of market sentiment could definitely land retail investors into trouble. There are many factors (like politics and economics) that are contributing to the present "feel-good factor" in the Indian equity markets. Though the country's GDP is expected to grow at more than 7% this fiscal, we should also remember that politics (that comes first in the top down approach) has uncertainties attached to it with elections just two months down the line. So, it is not advisable to invest in markets just on the basis on the positive sentiment.

    We would like to conclude by saying that one needs to tone down return expectations from the current levels. If one were to invest in equity markets at the current juncture, then the investment horizon needs to be around 3-5 years. We believe that current prices of most companies have already factored in the growth prospects for the next couple of years. However, though the selection of stocks would be difficult, proper assessment of fundamentals should ease the difficulty.



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