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Investing: A macro perspective - Views on News from Equitymaster
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  • Dec 8, 2005

    Investing: A macro perspective

    "The Sensex will hit 10,000 by year-end!" No, this is NOT our projection for the BSE-Sensex, so do not get unduly excited! But the point is that in these heady times where the markets have hit their all-time highs, one tends to get unduly over optimistic. One is often reminded of one of investment guru, Warren Buffet's investing 'mantras', that is, "be fearful when everyone is greedy and be greedy when everyone is fearful". At times like these, an investor can hear any number of people screaming themselves hoarse about how wonderful the India story is and how fundamentals remain strong and growth prospects are bright. "So-called market experts" go to town about how stock XYZ is a good investment and that "everyone is buying".

    Well, all we would say to this euphoria, or, to use a more sophisticated term, "irrational exuberance", is to ignore it! When everyone says that a particular company/industry is going to be "the next big thing FOR SURE", then it is most probably not going to be. An example is the tech bubble, where everyone and his uncle went hell-for-leather for tech stocks, thinking that they would keep posting 100% returns every year for eternity! Therefore, it is in such times that Warren Buffet makes the above-mentioned statements. Obviously, during the tech bubble, one had to be fearful and sell his/her holdings before getting swept away by the euphoria.

    We would like to get back to the basics here and just mention a few pointers to look for while investing. This is not with particular reference to any sectors, but a more macro perspective.

    • Political risk: Undoubtedly, this is one of the factors to take into account before investing on a macro level. The kind of government in power, either pro-reform or anti-reform, whether it is a coalition government, political will and so on are pointers to look at. For example, in a coalition government, with different factions having their own vested interests and agendas to pursue, the broader interests of the economy may not be their priority and often, economics gets sacrificed at the altar of politics, as can be seen in the case of the oil companies.

    • Economic growth: Of course, the kind of growth rate that the economy is clocking is another important factor to take into consideration. Sectors like steel, automotive, cement, oil and gas, banking and other highly economy-correlated sectors generally track the economic growth rate, plus or minus a few percentage points. Thus, taking into consideration the overall economic growth, one can then filter down the options to the sectors and then the respective companies. It should be noted that, regardless of the political party in power, the economy has always managed to clock a 6% to 7% growth rate over the past few years, making India among the fastest-growing economies in the world.

    • Future growth potential: This may seem like an obvious point, but every current and potential investor must consider the kind of future growth prospects that the economy has in general. This can be gauged from the demographic profile of the country. India, for example, has a majority of its population in the working age bracket. This augurs well, as more people will start working and the contribution to the national income will rise. This will also result in greater affluence and the willingness to spend more on consumer goods, entertainment, cars, travel, leisure and so on. The fact that the country has such a huge middle class population is a clear reflection of how lucrative a market this could be for companies from various sectors and accordingly, a decision can be made.

    • Fiscal situation: While growth prospects may be strong, the country's fiscal position must be considered. If the deficit is too high for comfort and the government is too profligate and does not seriously take steps to prune it, it will mean that greater borrowing will be needed to finance its expenses. This could result in crowding out of resources for the private sector and could hamper investment to that extent. The investment rate in the country is at around 25%-odd and in order to maintain a sustainable 8% plus GDP growth rate, this figure needs to increase substantially and hampering investment could constrain future growth.

    • Valuations: No question about it, this is the major factor to consider. It is the final stage of taking a decision. The country may have a stable polity, strong growth prospects and a lucrative market to tap, but if valuations are not attractive or enticing enough, then it would not be too sensible to pay too high a price. There is, undoubtedly, growth in this country, but the question is, how much are you willing to pay for that growth? Even if you buy the fundamentally best company in the stock markets, but pay too steep a price for it, your holding period will then be elongated and the payback period will be extended to that extent and you will then become a 'long-term investor' by default!

    Therefore, do consider these factors before taking the plunge in the markets. Of course, we have always believed that in such a market, where volatility is the order of the day, taking a stock-specific approach is always a better alternative than investing just on the basis of the Sensex levels. In fact, it is difficult to take a call on the indices as a whole and in any case, at levels nearing 9,000, valuations are not 'cheap'. Invest, but with caution!



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