Markets below 4,700! What to do? - Views on News from Equitymaster

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Markets below 4,700! What to do?

Oct 28, 2003

Amidst all the fanfare about the continuous inflow of money into the stock market through FIIs and the so-called 'another bull market', retail investors in general are faced with a difficult situation. After having run up by more than 40% since January 2003, the correction phase seem to have finally set in. Or so it looks. The following are the questions that one typically comes across at Dalal Street.

  1. Whether to enter the stock market at the current level or wait for the market to correct further?

  2. Even if there is a correction, how much will it tantamount to?

It is pertinent to note that the weightage for 'which stock to invest in?' as a matter of concern with a retail investor has relatively weakened compared to 'which level to invest at?' While brokerage houses are now predicting Sensex at about 6,000 levels in the next 12 to 18 months, the extent of rise that one has seen in the last eight months has surprised almost everyone (including the same brokerage houses). Then, equities were relatively 'less attractive' as compared to debt funds. It was difficult to convince investors to invest in equities.

Now that the stock market has moved up swiftly, the imperative to invest in equities seem to have strengthened. This is the case in any rising stock market where all stocks look attractive for the short, medium or long-term, even after the average 40% to 50% gains already. While the rally has brought retail investor attention, the correction has however, infused doubts i.e. when to enter?

As we have maintained throughout this rally at Equitymaster, it is pertinent to look at the downside before the upside in a bull market. Fundamentally, it has to be recognised that the stock market has corrected from the lows. Compared to P/E multiple in the range of 11 to 12 times in January 2003 on trailing twelve months earnings basis, the stock market is now hovering at 14 to 15 times. From here on, the soundness of the business model of a company will determine the future course of action. Even if the business is strong, it is important to judge how much of growth is already factored into the price at current levels. Expectations are high in some sectors like automobiles, engineering, banking and commodities. To that extent, investors have to exercise caution.

It has also got to be remembered that there could be redemption pressure from FIIs as the calender year draws close. The impending election will also play a major role. While government policies in general will not be affected in a great deal, the 'stability factor' is important for the country.

We are not saying that the stock market is not going anywhere from current levels. What we are saying is that...

  1. While the stock market per se could remain volatile, the Indian stock market is a bottom-up story. There are companies that could outperform benchmark indices as well as index heavyweights in the future. It is not necessary that the index have to move up for investors to make money in equities. Even during the so-called 'bear phase' in the last three years, a number of stocks have outperformed indices hands down. Stock selection is critical. In a volatile market, it is better to stick with quality names instead of investing in 'emerging mid-caps'.

  2. Expectations of 30% to 50% return on equities in a year on a consistent basis from the current levels are not realistic. While long-term prospects look impressive on fundamental premises, return expectations have to be lowered. Remember, risk increases in proportion with return.

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