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The biggest dilemma for an investor - Views on News from Equitymaster
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  • Aug 5, 2009

    The biggest dilemma for an investor

    Investors in the so called BRIC countries' equities seem to be facing a dilemma. The respective indices in all the four countries are up more than 50% so far this year. In fact, the Chinese benchmark, the Shanghai composite index has rallied more than 90% this year, fueling worries of an asset bubble. Also, valuations in India, where the BSE-Sensex has gained more than 60% this year have started to breach the comfort zone. However, if various reports in the media are to be believed, interest in these countries refuses to die down. In fact, it seems to be on the ascendance as it becomes increasingly clear that the emerging markets are the next big growth story given that their fundamentals are a lot better than those of the developed economies. While more and more money may continue to pour in, taking the benchmarks higher, the rally may not be justified if valuations are taken into account.

    Furthermore, in India, a deficient monsoon and the rise in prices of essential commodities may also come in the way of improving fundamentals. On the other hand, India has all the makings of a long-term structural growth story which the investors can miss at their own peril. Indeed, amidst such confusing signals, it becomes difficult to take a call. We have never been a fan of the art of timing the markets. On many an occasion, it remains just that, an art. Although there are chances that the index may head lower, it could also go a lot higher before it does so. In that case, one may not want to miss out on the rally. The best approach perhaps could be to take a bottom up approach and invest in a fundamentally sound company that does not appear to be a lot expensive by historical standards. Hence, even if the markets fall, one can buy more of the same company, thus lowering the average purchase price and setting oneself up nicely for the next big rally. In an environment where a lot goes into determining the price at which a stock trades, this perhaps would be the best approach.

    Regulation, the unlikely savior for India
    The great Indian escape from the global financial crisis is now a part of folklore. Indeed, we are not remotely as badly impacted by the crisis as some of the developed nations are. And most of the kudos for the same was given to the country's internal consumption driven growth model and the soundness of its banking system. However, Nobel laureate Amartya Sen attributes the escape to one more factor. India's far from free markets. In other words, markets in India were not self regulated and the regulators had some degree of control over them. Sen, speaking to a leading daily, argued that Western nations had a notion that the market should be a self regulating body free from control. But as the crisis has shown, if left on their own devices, market can enter a self-fulfilling phase where both optimism as well as pessimism feed on themselves, thus setting in motion a vicious boom and bust process. Hence, as the example in India shows, some degree of regulation from time to time helps control the excesses.



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    Aug 24, 2017 12:28 PM