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!
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