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What to make of the correction? - Views on News from Equitymaster
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  • Nov 4, 2009

    What to make of the correction?

    The dream run has ended with a big thud. At least for the time being that is. And the bulls have been halted in their tracks. Yesterday's correction has taken the Sensex lower by 11% in just a couple of weeks. Not that this rally that started in March 2009 has been completely unidirectional. There have been a couple of corrections before as well. But at 11%, the current one is indeed the steepest. And with the memory of that terrible decline in the aftermath of the financial crisis still fresh, investors may not want to take chances. They may want to jump onto the selling bandwagon. However, we have reasons to believe that why this correction could present a fantastic long term buying opportunity.

    First, let us have a look at the fundamentals. It has now been proved beyond doubt that the Indian economy is extremely resilient. When enough capital is available, it grows at 8%-9% and when it is not available in plenty, it grows at 6%-7%. And this trend is likely to persist for many more years to come. And if the economy grows, corporate earnings follow suit. Thus, from a long term perspective, it's a cinch that corporate earnings in India will grow at 12%-15%. With earnings power increasing, stock prices should also follow suit.

    However, with Indians still showing a fair degree of aversion to stocks, FIIs will have to continue to play a big role. And they are not likely to disappoint either. With India emerging as the few genuine growth stories in the world currently, it's inconceivable the FIIs turn a blind eye to India for a long time given that growth has become so hard to come by in developed economies. Thus, if you as an investor need to benefit from this India growth story, it is times such as these that present a great opportunity to buy fundamentally strong companies from a long-term perspective. So, don't panic and keep accumulating stocks that are a play on the India growth story and are available at reasonable valuations.

    One investor who is making merry
    While some investors may still be sitting on the fence, the one investor who's making full use of the current market conditions is the Oracle of Omaha, Warren Buffett. In a deal that could make its earlier investments in securities of companies like Goldman Sachs and GE look like peanuts, his cola to insurance conglomerate Berkshire Hathaway has decided to fork out a massive US$ 44 bn to buy the US rail road giant Burlington Northern Santa Fe Corp. This also makes it his biggest deal so far, trouncing the US$ 22 bn purchase of General Re back in 1998. It should be noted that Buffett already owns a small stake in the company. Indeed, as he himself described, the deal is an all-in wager on economic future of the United States.

    For a man who wouldn't touch anything that does not have a sustainable competitive advantage, the rail road giant must surely be having something going for it. And if we were to follow his earlier rationale of buying a part stake in the rail road giant back then, he had mentioned that trains had started to become more competitive against trucks in the backdrop of higher fuel prices. Also, since it is very difficult right now for a new entrant to build railroads, the incumbent players can have all the market to themselves. Hmm, now that's some long-term moat, isn't it?



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    2 Responses to "What to make of the correction?"


    Nov 13, 2009

    While FIIs do have some amount of effect on the stock market, the domestic mutual funds and institutions like UTI,LIC etc also have a significant clout. Only they have been far too conservative in their approach.
    If the Indian govt allows the Pension funds to invest, in the Stock market , the dependence of the Market would not be all too dependent on the FIIs.


    Sebastian George

    Nov 6, 2009

    Gone are those days when relay on Beta co-efficient,
    EPS, Dividend pay out ratio, PER etc. Now things move around upon how FII's behave. If they buy in bulk say;
    5,ooo cores Index will move up and if they sell more than what they bought Index will go down.

    Now can any research team forecast with their expertise
    the behaviour of IFFs? No, simply not possible. Once you can do that you can make money....

    Thats it.

    Sebastian George

    Equitymaster requests your view! Post a comment on "What to make of the correction?". Click here!

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