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Avoid short-term - Views on News from Equitymaster
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  • Jan 21, 2004

    Avoid short-term

    Last week's 300-points BSE-Sensex correction (though largely expected) must have given the jitters to many investors, especially the ones who look at the stock markets as a trading platform rather than an investment option for the long term. During such times of volatility, it is generally the retail and short-term investors, which tend to be on the receiving end - receiving the sell-off brunt and consequent losses. It is this class of investors that tends to suffer the most owing to the daily and weekly volatility witnessed on the bourses, as they generally do not have the capacity to hold on to their positions.

    Talking about volatility, it must be noted that volatility has increased considerably over the last one year. Considering that the difference between the highs and the lows of the Sensex on a daily basis would give some indication of the intra-day volatility of the index, the same has increased from odd 30-points (monthly average) on a January 2003 day to about 150-points on a January 2004 day. Undoubtedly, the volumes during this period on the BSE have also gone up by about 35%.

    Apart from the fact that there are always traders in a market who have the habit of getting in and out of stocks, thus collectively affecting the stock price movements, the larger players (read Foreign Institutional Investors (FIIs) and mutual funds (MFs)) have a greater effect (see chart above). Though there may be inflow and outflow of money on a larger scale in the short-term, the fact remains that FIIs have invested almost US$ 7 bn in 2003 and current indications are that on the back of the existing macro-economic fundamentals, this class of investors would continue to have a favourable outlook towards India over the next couple of years. Further, it must be noted that while the growth story of India Inc. and the Indian economy per se is nothing to worry about over the longer term, it is the short-term perspective, which leads to uncertainties in the stock markets.

    However, valuations also need to be paid heed to while investing into equities, as they more often than not tend to exceed over what is actually deserved. A simple example of this would be the recent behaviour of the Indian stock markets despite the 'expected' and 'better-than-expected' results announced so far by Indian corporates. The larger reason for this seems to be the fact that the current performance has already been factored into the stock prices of majority of the companies. Further, at the current juncture, the P/E valuation of the Indian bourses is already at about 18x (15x FY05 expected earnings), which topples it from the list one of the most lucrative emerging markets. This is close to the levels usually commanded by the Indian bourses at about 16x-17x (see chart above). Thus, from hereon, the story on the Indian bourses would be different in the sense that it would now be more stock specific rather than the across the board gains akin to 2003.

    With this in mind, it is advisable to be cautious and invest in strong managements, business fundamentals and finally relatively attractive valuations. Investors need to understand that in the long term, fundamentals and not expectations guide stock prices. Though there may be short-term volatility, as traders get in and out of stocks, hold on to fundamentally sound companies. They are sure to reward the investor in the long run.



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