Sign up for Equitymaster's free daily newsletter, The 5 Minute WrapUp and get access to our latest Multibagger guide (2017 Edition) on picking money-making stocks.

This is an entirely free service. No payments are to be made.

Download Now Subscribe to our free daily e-letter, The 5 Minute WrapUp and get this complimentary report.
We hate spam as much as you do. Check out our Privacy Policy and Terms Of Use.
Stockmarkets: 'Goodbye' or 'good buy'? - Views on News from Equitymaster
  • E-MAIL
  • A  A  A
  • Jun 29, 2005

    Stockmarkets: 'Goodbye' or 'good buy'?

    The rise in the Indian stock markets has seemingly come to a halt, or more aptly put, they have been in correction mode for the last couple of trading sessions. While this is being interpreted as a consolidation phase by optimists citing it as a 'much-needed healthy correction', the pessimists, who have been predicting a correction ever since the BSE-Sensex made new record highs by breaching the 7,000 levels, are of the view that the bull-run is (almost) over. So, with the markets clearly divided at the current juncture, this has left retail investors pondering over the question, are the markets a 'good buy' at the current levels or is it time to say 'goodbye' to the markets.

    Well, taking the first part of the question first, the benchmark index i.e. Sensex is currently trading at about 15.7 times trailing 12-month earnings, which is also the average valuation (excluding the high valuations of 2000) at which it has traded at historically. This is justified by the fact that the Sensex companies have managed an 18% to 20% average growth in earnings over the last decade. However, since investments are based not on the basis of trailing 12-month earnings but rather on the basis of forward projected earnings, assuming a conservative 15% CAGR over the next couple of years, it would make Indian stockmarket valuations quite appealing with Sensex P/E under 12 times earnings. This, in our view, is not a level that should make one nervous. However, this should not overshadow the fact that we continue to remain skeptical of the meteoric rise witnessed in most of the mid-caps and many large-cap stocks.

    But, as you may be wondering, what about whether is it a good time to buy into equities. In reply to this, we would like to say, and answer the second part of the question in the process; it is never 'goodbye' to equities. One must remain invested in equities, as it has been proved that equities have been the best performing asset class over the long-term. Of course the quantum of exposure to equities would vary depending on the risk profile of the investor, the age, earnings, and many more factors that go into deciding the allocation of funds. Further, the approach to investing should not be a 'lump sum' amount invested at one go but should rather be a gradual process, wherein a fixed amount of money is invested at regular intervals. This is popularly known as systematic investing planning. The one big advantage of this kind of investing is that it tends to iron out the market volatilities witnessed time and again.

    However, apart from valuations, what is it that makes Indian equities attractive? And the answer to this is - potential. Be it agriculture, or industries, or services, we have, or are making our presence felt around the globe. Notably, India Inc. is not only becoming efficient and effective in its performance, it is also becoming globally competitive. We have, for example, Tisco and Hindalco as amongst the lowest cost and best quality steel and aluminium producers in the world, Infosys and TCS as examples of world-class work practices and corporate governance and Bharat Forge recognised as amongst the quality auto component makers in the world. There are many such examples that one can observe in the Indian context. Part of this transition should also be credited to the opening up of the Indian economy in the early 1990's that forced Indian corporates to tighten their belt and improve their competitiveness and efficiency if they had to survive.

    Apart from this, another seemingly big opportunity for India is the power of domestic consumption. It must be noted that as much as the Chinese, the Americans are also responsible for their growth, as China produces and the Americans consume. However, while undoubtedly exports have contributed to India's GDP growth, we continue to remain a largely domestic consumption driven economy. Further, considering the latest projections by the National Council of Applied Economic Research (NCAER), which indicates that those with an income of Rs 2 lakhs per annum are likely to treble between FY02 and FY10, those earning Rs 5 lakhs are set to quadruple. Further, the higher income group of between Rs 5 lakhs to Rs 10 lakhs is also likely to register a strong growth rate. All this has been projected assuming a GDP growth rate of under 7% per annum. This, thus, indicates the huge existent potential of the demand for consumer durables, automobiles (both two-wheeler and four-wheelers), services like telecom, banking, insurance, etc.

    To conclude, while the potential for Indian equities do remain attractive, investors must understand that a reasonable average return is possible only by keeping a 3-5 year perspective in mind. Even at the current juncture we believe that there are good companies to invest with a loner term time horizon. However, one thing that investors must always remember is to investigate before investing!



    Equitymaster requests your view! Post a comment on "Stockmarkets: 'Goodbye' or 'good buy'?". Click here!


    More Views on News

    How to Ride Alongside India's Best Fund Managers (The 5 Minute Wrapup)

    Jun 10, 2017

    Forty Indian investing gurus, as worthy of imitation as the legendary Peter Lynch, can help you get rich in the stock market.

    Why NOW Is the WORST Time for Index Investing (The 5 Minute Wrapup)

    Aug 18, 2017

    Buying the index now will hardly help make money in stocks even in ten years.

    Trump Takes a Beating (Vivek Kaul's Diary)

    Aug 18, 2017

    Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.

    How To Read Your Mutual Fund Account Statement Correctly (Outside View)

    Aug 17, 2017

    PersonalFN simplifies the mutual fund account statement for you.

    This Small Cap Can Drive Chinese Players Out of India (and Make a Fortune in the Process) (The 5 Minute Wrapup)

    Aug 17, 2017

    A small-cap Indian company with high-return potential and blue-chip-like stability is set to supplant the Chinese players in this niche segment.

    More Views on News

    Most Popular

    Demonetisation Barely Made Any Difference to Tax Collections(Vivek Kaul's Diary)

    Aug 7, 2017

    The data tells us quite a different story from the one the government is trying to project.

    A 'Backdoor' to Multibaggers: It's Like Investing in Asian Paints Ten Years Ago(The 5 Minute Wrapup)

    Aug 10, 2017

    Don't miss these proxy bets on growing companies or in a few years you will be looking back with regret.

    Should You Invest In Bharat-22 ETF? Know Here...(Outside View)

    Aug 8, 2017

    Bharat-22 is one of the most diverse ETFs offered so far by the Government. Know here if you should invest...

    Signs of Life in the India VIX(Daily Profit Hunter)

    Aug 12, 2017

    The India VIX is up 36% in the last week. Fear has gone up but is still low by historical standards.

    7 Financial Gifts For Your Sister This Raksha Bandhan(Outside View)

    Aug 7, 2017

    Raksha Bandhan signifies the brother-sister bond. Here are 7 thoughtful financial gifts for sisters...

    Copyright © Equitymaster Agora Research Private Limited. All rights reserved.
    Any act of copying, reproducing or distributing this newsletter whether wholly or in part, for any purpose without the permission of Equitymaster is strictly prohibited and shall be deemed to be copyright infringement.

    LEGAL DISCLAIMER: Equitymaster Agora Research Private Limited (hereinafter referred as 'Equitymaster') is an independent equity research Company. Equitymaster is not an Investment Adviser. Information herein should be regarded as a resource only and should be used at one's own risk. This is not an offer to sell or solicitation to buy any securities and Equitymaster will not be liable for any losses incurred or investment(s) made or decisions taken/or not taken based on the information provided herein. Information contained herein does not constitute investment advice or a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual subscribers. Before acting on any recommendation, subscribers should consider whether it is suitable for their particular circumstances and, if necessary, seek an independent professional advice. This is not directed for access or use by anyone in a country, especially, USA or Canada, where such use or access is unlawful or which may subject Equitymaster or its affiliates to any registration or licensing requirement. All content and information is provided on an 'As Is' basis by Equitymaster. Information herein is believed to be reliable but Equitymaster does not warrant its completeness or accuracy and expressly disclaims all warranties and conditions of any kind, whether express or implied. Equitymaster may hold shares in the company/ies discussed herein. As a condition to accessing Equitymaster content and website, you agree to our Terms and Conditions of Use, available here. The performance data quoted represents past performance and does not guarantee future results.

    SEBI (Research Analysts) Regulations 2014, Registration No. INH000000537.

    Equitymaster Agora Research Private Limited. 103, Regent Chambers, Above Status Restaurant, Nariman Point, Mumbai - 400 021. India.
    Telephone: +91-22-61434055. Fax: +91-22-22028550. Email: info@equitymaster.com. Website: www.equitymaster.com. CIN:U74999MH2007PTC175407

    Become A Smarter Investor In
    Just 5 Minutes

    Multibagger Stocks Guide 2017
    Get our special report, Multibagger Stocks Guide (2017 Edition) Now!
    We will never sell or rent your email id.
    Please read our Terms


    Aug 18, 2017 (Close)