When will the buying opportunity come? - Views on News from Equitymaster

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When will the buying opportunity come?

Jun 23, 2010

Indian investors have to contend with two conflicting set of facts right now. Let us take them one by one. First is the bailout package that the leaders of the developed world used after the global financial meltdown. Basically, the governments had to pitch in their own credit to bailout parties whose credit became unacceptable. This influx of credit was like a massive dose of medicine to rescue a patient who was slipping away. But such a strong medicine will have side-effects. And the financial side effect of the massive bail out programs is the rapid rise of prices across asset classes. Be it stock markets, real estate or gold. When such a deluge of money starts chasing assets, prices go up. But here's the catch, the bailout packages can only be a short term measure. In the long term, the developed nations will have to do the opposite of flooding the economy with money. They will have to drain it and bring about structural changes. Simple but difficult changes like living within one's means and not on one's credit card. Such measures will begin sooner rather than latter. Simply because the medicine - government credit - itself seems to be losing its efficacy. As noted investor George Soros points out in a recent speech, that is exactly what the recent European subprime crisis indicates.

If a large influx of money can cause prices to rise across asset classes, surely the opposite is also going to be true. As and when governments in the West decide to roll back the deluge of money, prices will contract. The breathtaking rally soon after the stock markets collapsed came as a pleasant surprise for investors. We believe, the draining out of the bailout packages will bring about the opposite reaction.

The underlying fundamentals

Now, on to the second set of facts, which are particularly relevant to Indian investors. No matter whether stock markets collapse, rally back or collapse again, the underlying fundamentals remain intact. That of the India growth story. A huge nation of eager consumers and producers will keep economic activity buzzing. There are too many economic problems to solve. More roads, power, housing, education, healthcare, better lifestyle, so on and so forth. And the solution to each of the problems will result in economic activity. As agents of economic activity, companies will create wealth. Investors who have stock holdings in such companies will benefit. Unless of course, India tragically decides to stick to its past ways and curb the aspirations of a billion plus people. By all indications that is not going to happen.

Conclusion

To sum up, there is a very strong underlying reason why investors should own well-managed sound Indian companies. That doesn't change because the developed nations' credit machinery is broken, mended or broken again. But the price at which excellent Indian companies are available is a function of the cues emanating from the West. Our advice to Indian investors is to act decisively when the prices are right.

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3 Responses to "When will the buying opportunity come?"

preet sagar

Jul 7, 2010

i really appreciate fare comments and are very useful to arrive at decision. my suggestion is whenever a good share jumps up/down more than 10%, if reasons therefor come from equitymaster same or next day, the viewers would love the most the equistymaster
regs

Like 

Jothi

Jul 1, 2010

It is thoughtful & well analysed in all angles and very useful to the beginners who are in the capital market. In fact the article is trimming the mindset of the investors.

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Ujjwal Mukherjee

Jun 24, 2010

A brief but very apt and excellent article. I like and appreciate what the folks in Equitymaster are trying to do and that is educating the investors about the ‘right’ way of investing. Kudos to them !!

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Equitymaster requests your view! Post a comment on "When will the buying opportunity come?". Click here!

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