"The time has come", the Walrus said, "to talk of many things."
And so, in the spirit of Lewis Carroll, it is time to talk about why investing in the Indian stock markets is a pretty sensible thing to do.
Day in and day out we have been bombarded by the news of gloom and doom. Watching the business news channels has been depressing.
Reading the newspapers has been depressing.
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Luckily, we have the comical relief provided by the elections and the wonderful speeches of hate and violence to inspire us to move onward, to move forward.
And we also have the sense of history.
To chart out where the Indian markets have come from - and where they could go.
A few weeks ago, I was asked on a TV channel to make a case for why the market could go down.
I replied that I could also make the case for the BSE-30 Index to head up - to a level of 20,000.
The point is that no one really knows where the markets will be on a day to day basis.
Or even next week.
Or next month.
Maybe someone knows, but I don’t really follow that sort of short term advice.
It does not meet my objectives.
And nor should it meet yours.
Underlying business, underlying management
Investing in shares is actually an investment in the underlying business of company.
In the ability of the managements of those businesses to ride the company through good times - and bad times.
Of course, you need to be careful that you don’t end up investing in companies where the management starts riding a tiger of fraud and deceit -as Satyam shareholders found out.
Or one in which the horses are pulling two carriages - one with air-conditioned comfort for the founder promoters who get their rich exits (as in the case of Ranbaxy) and one for the rest of us chumps.
Nothing illegal about it.
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But what makes me a buyer of Indian stocks are
a few fairly simple assumptions and facts:
- The Indian stock market has done well over the past six years. After some semblance of control over the outbreak of SARS, global investors began looking to invest in more "risky" places. In the past 6 years, the BSE-30 Index has given a +228% return in US Dollars - with dividends reinvested back in the market (see Graph 1). In comparison, China has given a return of +109% and the MSCI Emerging Markets Index has given a return of +137%. The Indian economy is more balanced than some of the larger emerging market economies. China is very reliant on exports; Russia is dependent on oil exports; and Brazil is dependent on a few commodities and China’s ability to export these processed commodities to the developed world.
Graph 1: India does better than China and emerging markets index
- The Indian economy has been affected by the global slowdown. Some Indian companies had planned their businesses around a booming global environment. That has disappeared. And these companies will have a few tough years as they navigate themselves out of the excess capacity and international adventurism. But there are other companies that are still focusing on the Indian consumer. And their growing needs. The level of the BSE-30 Index in relation to the historical earnings of the BSE 30 Index is now 14x, and the all-time low was 10x in 1998. This compares with the Price-to-Earnings Ratio of 21x. This is the average over a 20 year time period (see Graph 2). Profit margins of companies have been under pressure for the past few months but - given the inherent growth in the Indian economy - revenues will resume their growth again as will profits. Stock markets move on anticipated profits, and this should cause the markets to rise.
Graph 2: Indian stocks are cheap
- But will the market rise immediately? Will it continue its recent rally? In the near term, a lot of this depends on what the foreign investors do. And it also depends on the election results which will not be known till June 3rd. the markets have regained the 10,000 level - its fourth attempt to stay above this level since last November, 2008 (see Graph 3).
Graph 3: Are the charts pointing up?
A lot of short term concerns are in conflict with long term trends. In the short term, the gloom and doom will win but in the long run, the markets will give patient investors sensible returns.
Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
||Quantum Long Term Equity Fund
||Quantum Gold Fund
(NSE symbol: QGOLDHALF)
|Quantum Liquid Fund
|An investment for the future and an opportunity to profit from the long term economic growth in India
||A hedge against a global financial crisis and an "insurance" for your portfolio
||Cash in hand for any emergency uses but should get better returns than a savings account in a bank
||Keep aside money to meet your expenses for 6 months to 2 years
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Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited.