Of Chinese whispers & Indian equities! - Views on News from Equitymaster

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Of Chinese whispers & Indian equities!

Nov 29, 2005

Yesterday was quite an eventful day for India. While the Indian cricket team defeated the Proteas to level the one-day cricket series, the Indian stock markets (read, the Sensex) cruised higher to cross the 'much-awaited' 9,000 points level. While the Indian cricket team had to come from behind to register their win over the world's second best team, the stock markets' moved up with effortless ease. At this stage, loud noises of 'what to buy?' seem to have turned to whispers as every investor is trying to get hold of (clandestinely) the 'one' stock that is still undervalued despite the markets having turned overbought. And now with experts vouching for the Sensex to reach the 10 k level by this year-end, the whispers have got thinner and thinner. Every one wishes to get hands to that 'elusive' buying opportunity that does not really seem to be there in the whole scheme of things.

At the current levels, the Indian markets (the Nifty) are trading at 17.8 times trailing 12-month earnings. Even considering that the constituent companies of the Nifty grow their earnings by 15% each year in the next two years, the 2-year forward P/E comes to over 13.5 times. For foreign investors, these valuations are not really 'attractive' considering that most of the other emerging markets are trading at sub-15 P/E on a trailing 12-month basis.

As far as domestic retail investors are concerned, while there still are selective opportunities in the waiting to be grabbed for long-term investing purposes, the risk return ratio has skewed deeper towards the former, i.e., risk. At the current juncture, thus, we believe that investors should introspect about the sustainability of this 'liquidity driven euphoria'. It would be a wise move now to think about what could go wrong that could lead to Foreign Institutional Investors (FIIs) (as they are the pump primers of this rally) pulling out their investments from Indian equities.

We have already witnessed (in October 2005) as to what can happen when FIIs decide to pull out. While our concern should not be construed as if we are bearish on the markets, since we continue to believe that Indian equities are a place to remain invested in for the next 3 to 5 years, we do believe that investors must strictly follow a bottom-up approach to investing. Do not rely on 'whisper-based' investing. That is going to lead you to nowhere!

Note: When a story is told from person to person, especially if it is gossip or scandal, it inevitably gets distorted and exaggerated. This process is called Chinese whispers.

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