(This piece appears in Moneylife magazine)
The Joys of Uncertainty
It is interesting to see the big debate on our markets in the context of ‘expected’ doom that is being forecast for the American markets. And just to put it in perspective, the doom prediction is also a forecast from someone who sees a monster pattern in the charts, so it adds credibility to people who believe in charts and Ouija boards. Since the investment world is not a rational one, I guess these kind of forecasters are perhaps more relevant once you run out of fundamental reasons to support a cause.
Our markets are perhaps under the spell of an ancient Chinese blessing (May you live in interesting times). Otherwise, how does one explain the following factors?
i) The markets are a near two year high;
ii) The P/E multiple is almost at 22 times;
iii) There are no value stocks available ( Am not talking about finding obscure companies with micro market capitalisation);
iv) Earnings growth continues to be strong with the June quarter results being quite strong with profit growth of over twenty percent;
v) Dividend yields (though Indian promoters hate to give money to non promoter shareholders) just above one percent;
vi) Price to Book Value is upward of four times (this is not relevant to India, since most companies stated asset costs are divergent with real costs due to funny accounting, over invoicing and inconsistent depreciation policies);
vii) Interest rates showing an upward bias, with ten year yields nearing eight percent and corporate borrowing rates going up;
viii) Gold prices are at record highs;
ix) Inflation on the ground abating, but price levels still at very high levels across commodities, food products, fuel and every other thing;
x) Central government finances are better than last year, but if you exclude the realisation of sale of family silver (the 3G network) not very comforting;
xi) Middle class buying continues unabated thanks to easy money and supply bottlenecks;
xii) Moneyflow in to Indian markets continues to be good and if there is a global crises, the amounts invested are an insignificant part of global wealth and will not run away;
xiii) Analysts, Economists, Planning Commission members, government mouthpieces and non traditional forecasters are all of the view that India will grow rapidly, irrespective of what happens to the world;
xiv) India, China, Russia etc are countries where the future of the world is etc;
xv) Buy recommendations from analysts, brokers outnumber sell recommendations by more than 20 to 1;
xvi) Corporate action (mergers etc) is strong;
xvii) IPO’s are back in fashion, with fads like microfinance queuing up;
xviii) Real estate markets are recovering all over India;
I can add to this list with a few more good things.
So, the only conclusion I can draw is that we are ‘buying’ in to optimism. Optimism- that growth is forever and should be easily above twenty percent. We do not care about the rest of the world.
We will slowly see bad news coming. What shape will it take? Protectionism (like raising visa fees, imposing quotas) from slow growing economies is surely one of them. The other could be in the form of inflation in double digits continuing for a few more years. Do not trust government numbers on this. Keep track of daily living prices, rents etc.,
But, the argument goes that even if bad news were to descend on our economy, the liquidity will not be impacted. This is simply because we are different. Ours is the land of hope. So, money managers world over will not disturb their assets in India, for fear of missing out if something were to happen. Also, the government may announce more positive things like permitting FDI somewhere, removing controls somewhere etc., So, we will have ‘good news’ flow coming in, that would stop the foreigners from taking away their money from our markets and may prompt them to hike their stakes in India. The FII’s have a total AUM of nearly ten lakh crores of rupees, with around fifteen percent coming in through Participatory Notes. They are the ones to decide the future direction of this market.
From the domestic side, the much hated ULIP is the biggest (perhaps the only) incremental investor in Indian markets. Retail investors are yet to make their direct presence felt, a sure sign that we are yet to reach the top.
So what does one do? Wait, sell or buy? This is a good time to sell and if I take the next ten years as the horizon, we should get same or lower prices at some points in time. One possibility is that the markets may remain in the range of 15,000 to 19,000 for the next few years, waiting for earnings to catch up. Of course, a surge in liquidity can lead to a blow out on the upside and if the markets touch anything like 21000 in the next twelve months; it may be a great selling opportunity.
If you are a long term investor (i.e. one who does not ‘need’ to sell) then keep your good quality stocks and dump the dubious ones or those that have become grossly overpriced in relation to their earnings.
The key dilemma is what to do with fresh money? My call is to keep it in some fixed income instrument and wait for better times. Ultimately, either price has to wait for earnings to catch up or correct in order to align with the earnings. Of course, if I take the last ten years as an example, the markets remain overvalued for a long period and good buying opportunities came just about twice.