Jul 18, 2005|
Here comes the Samurai!
"Markets can remain irrational longer than one can remain solvent". In a bull market, whatever is reported is generally accepted at face value and acts as a reason to buy. Leave aside the fact that Foreign Institutional Investors (FIIs) inflows, despite the various concerns, continues unabated. Also, leave aside the fact that based on fundamentals, valuations of stocks from select sectors are stretched. This time, as always, there is a new buzz on the Dalal Street.
The buzz is that the Japanese funds are entering the Indian markets in a big way and the estimated corpus ranges from US$ 1 bn to US$ 5 bn and it keeps increasing in line with the rise in Sensex each day. If this is not enough, there were reports of Taiwanese, Koreans and you name it, all funds entering India in a big way! While we do not have proof to substantiate that funds are indeed flowing from these Asian economies, wondering who has it anyways!
The issue is not that funds from these Asian economies are investing in the Indian stock market. If overseas investors find India attractive on a relative basis, we will continue to attract foreign money. But we have serious issues when it is projected to the public in such a way that these funds will take the Sensex, or whatever the index is, further upwards. This, in our view, SHOULD NOT be the premise on which an individual investor should take investment decision in equities at the current juncture. Rather, the focus now should be on risks, as opposed to returns. In our view, following are some of the risks:
Expectations: In one of the recent television programmes it was pointed out that the Sensex, at the current levels, is trading at valuations, which is dramatically lower than 1992 was highlighted. But the fact of the matter is one is comparing the current market with the stock market boom in 1992 (led by the famous replacement market theory). In our view, the current valuations are not cheap by any yardstick. Yes, there are good companies to invest in (this number is decreasing at a faster clip) select sectors. But expectations of the stock market are such that even if there is a slight disappointment, the reaction is likely to be negative. Take the case of Infosys itself. Even after a good set of numbers, the fact that 'expectations' were not met in one single quarter, resulted in the stock falling post the result. Wonder how true were those expectations?
Crude at US$ 60: Is anybody concerned about crude prices and its implications on the stock market? The very fact that crude prices have been going up in the last two years has resulted in the market taking this as a 'routine'. We believe that there are serious implications of higher crude prices on the economy and on corporates. Higher crude prices leads to inflation, which in turn, has the potential to slowdown the economy. Watch the fiscal deficit and interest rates.
Government in hibernation: Someone said that India is a consensus country. And the current government is doing just that. For selling just a 10% stake in BHEL (which they call it as disinvestment. Again, wonder why!), there was a debate for more than a month. The final result was to postpone the so-called 'disinvestment'. The rate at which the oil companies are losing money, soon they will be in losses. Ideal disinvestment candidates, in line with the common minimum programme. The absence of political vision and a consensus led policy-making decisions will hamper India's economic growth.
Despite these factors, the stock market believes that the Samurai's will keep the index from falling and there is only one way i.e. UP. It is not that we are negative on the market. We are only concerned with respect to the way things are projected to the investor. There are companies where the risk-return matrix is still favorable from a three-year perspective. At the risk of sounding repetitive, we believe that investors should be more worried about the downside than the upside at any point in time.
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