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Focus on fundamentals

Jun 3, 2004

Every event gets overplayed in the equity markets, be it elections or be it GDP growth numbers or be it disinvestment issues, etc. As we have seen in the recent past, stocks from the power, energy and banking sectors were the biggest losers (down more than 30% on an average). Now there is one question to be asked, is the new government capable of doing so much damage to the markets that NSE-Nifty is trading below 13 times P/E ratio and we are still hesitant to buy. Or were markets too bullish three months ago that we were comfortable buying, when Nifty was trading at P/E multiple of 18x?This situation somewhat replicates a typical retail investor's investment behaviour who is more comfortable buying when the prices are peaking (November 2003 to March 2004) and is comfortable selling at the low prices (April 2004 till date). The Fed chairman, Alan Greenspan had devised a very interesting phrase called "Irrational Exuberance". This was in response to the tech bubble in year 2000 when supported by strong tech sector valuations as the US stock market P/E went through the roof. It seems that Indian markets, to an extent, were showing the same kind of irrationality. So were markets over valued earlier or are they undervalued now? Let's try to analyse.

The argument in support of the market reaching beyond 6000 was healthy GDP growth numbers for FY04, higher FII inflows, reforms introduced by the NDA government and, last but not the least, good monsoons. Comparing India with other emerging economies, that time too India was trading at cheap valuations so it will be difficult to say that it was over valued then. Lets' see whether it is undervalued now.

If we look at the arguments in favour of a bullish market, probably they are still as good as they were earlier. The GDP growth prediction given by Reserve Bank of India (RBI) is more than 7% for FY05. The new government has assured that reforms will continue with special focus on agriculture. Though there may be some hiccups in power reforms (some states giving free power), but one must understand that it has been a very short time since the new government has come in. It will take some time for things to settle down. So what happened during the last year of the so called reformist NDA government should not be expected in the first month of the new government. As far as Foreign Institutional Investors (FIIs) are concerned, they will certainly be back once government starts performing. And that will present an opportunity for the investor to book profits.

But one must buy stocks for the right reasons, after looking at the fundamentals of the company. For e.g. investing in companies expecting divestment may not be the best of motives, instead fundamentals should be the focus. So investments based on fundamental research may be the best way to invest in the markets, because fundamentals don't change overnight, and in the long-term fundamentals are reflected in the stock price.

As rightly said by investment wizard Warren Buffet. "Stock markets are like a voting machine in the short-term and a weighing scale in the long-term, to highlight the importance of long-term investing". So we would like to conclude by saying, buy at the every opportunity and hold it for long term. You will have the last laugh.

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