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Recognize value not valuations - Views on News from Equitymaster
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  • Feb 17, 2004

    Recognize value not valuations

    The BSE-Sensex has crossed the crucial 6,000 mark, however the movement of the indices indicates a sense of caution among investors. To an extent the caution among investors seems justified. The first time the Sensex scaled the 6,000 mark was during the 'Dot-Com' bubble, however soon after that the markets crashed. The situation currently is not the same as February 2000, the rally on the indices has been supported by the strong fundamentals of the Indian economy as well as the Indian industry. However, one aspect of the stock market, i.e. risk, continues to be a common factor in both the periods.

    What we are trying to indicate is that whatever the levels of the stock market, risk is always a reality in the same. And especially in a situation where, the valuations across sectors seem stretched and there are impending events that could affect the markets. What does the retail investor do in this kind of a situation? What are his options?

    Next 6-12 months could be crucial as there are a series of events that will to an extent determine the sentiments of the markets. For one the general elections are round the corner and this is likely to play an important role in setting the mood of the markets. While the current government has initiated various economic reforms, the continuity of the same to a large extent would depend on their reelection. Thus the uncertainty could play on the minds of the investors and markets could be volatile. The slew of IPOs in the market could further determine the direction of the same in the months to come.

    Indian corporates have returned to the equity IPO markets in an unprecedented manner. IPOs to the tune of nearly Rs 200 bn are expected in the next 2-3 months. Since IPOs are a big draw for retail investors we could see a lot of retail participation in the same. The retail investor would fund these IPOs by way of fresh capital or by diluting his/her existing investments (mainly in equities). Hence this will determine the level of the markets in the next few months, because if fresh investments are made then the markets could rise further. On the other hand if existing investments are diluted then the markets could continue to remain lackluster.

    The outcome of the current Indo-Pak dialogue could also be another factor that could influence the market sentiments in the short-term. The above factors indicate that it could be a choppy ride for the markets in the short-term. We therefore advocate that in order to mitigate the effect of these few factors one needs to keep a long-term perspective in mind, this is because more often than not true value of a stock is reflected in the long-term. Investors need to understand that the fundamentals of a sector or companies in the same do not change overnight. The rally witnessed in the Indian stock markets was more due to people noticing the inherent value in the same rather than the fundamentals changing drastically. Thus, investors need to recognize value above all else and not valuations. While valuations may mislead the investor, value never does.



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