Saturday, June 18, 2011


( This appeared in a recent issue of Moneylife)

Our stock markets seem to have stuck in a range. It neither breaches the 20 thousand mark on the BSE Sensex convincingly nor falls low enough to make buying attractive. Corporate results being announced for the full year ended March 2011 seem to be in line with market expectations. Negative voices, expressing concern on the valuations as well as the possibility of more attractive opportunities elsewhere, do not seem to have dampened the cash coming in to our markets.
Valuations are rich, pricing in growth in earnings of over twenty-five percent year after year. Inflation is sticky and refuses to come down. Gold, silver, crude and global stocks are all moving up. Some metals have lost lustre, but overall, the mood is without any caution.
As I write this, there is news out that Mr KV Kamath is taking over as Chairman of Infosys. This company deserves a relook for reasons other than valuation. This decade would perhaps see the exit of its original team of founders and no dominant shareholder. Someone large enough could perhaps make a takeover attempt on it. I would like to keep an eye out for companies where families are likely to sell out. Mergers and takeovers are not possible in the Indian context unless there is a willing seller. Or else look for companies like an Infosys or a L&T where there is no dominant ownership.
The other thing that is likely to keep valuations in check is the Central Bank’s actions that would make borrowing unreasonably expensive. Instead of attacking inflation from the supply side (a long term solution rather than a quick fix one) the Central Bank is trying to make borrowing more expensive. This is precisely the wrong thing to do. This will make capital spending more expensive and lead to postponement of projects. Sectors like construction will get hit badly. So, the Central Bank will contribute its bit in keeping profit growth down for many Indian companies.
FMCG and MNC companies continue to do exceedingly well. They are likely to do better, but stocks in this pack are not exactly cheap. Capital goods and labour intensive sectors are seeing pressure on their operating margins as increasing wage costs become a concern. Service sectors like banking and IT are facing a shortage of competent people and are managing to add headcount by compromising on quality of people.
All in all, there is reason to believe that things look ok, but no runaway upside is visible.
So, what can cause a downslide in our markets? Clearly fundamentals do not matter, given the fact that our markets are driven by the inflow / outflow of FII money. Political crises and corruption clearly do not worry the institutional investor. Otherwise how else does one explain the fact that stocks of companies, whose key executives have been put behind bars, continue to trade at not so cheap valuations? It is clearly an indicator that the market participants do not think much of governance issues.
Gold and silver continue to defy gravity and head in to bubble territories. The excess currency supply in the world and the weakness in the global economy are making people run away to gold and silver. The global economy seems to show some signs of recovery, but the withdrawal of stimuli would surely dent global growth. On top of that, the rating agencies are threatening to downgrade US and Japan. Food inflation is clearly a global concern. US is facing the twin issues of jobless growth and a declining currency.
In all these worries, the global stock markets are strong. Clearly a case of excess money in the world that is trying to find havens of safety and some money chasing higher returns from riskier markets like India or Brazil.
So, logic and reason seem to be clearly not a driving factor for the global equity markets. It seems more like a case of too much money going around and no one wanting to miss a party if it happens. Everyone is willing to pitch tent and wait it out.
In such a context, where global money flows in to our markets are robust, a significant downside may not happen. Many investors seem to be wanting a significant downside, so that it becomes a buying opportunity. The markets seem to be testing them. The BSE Sensex seems to get stuck in a groove, refusing to decisively cross 20 thousand. At the same time, it falls by a couple of thousand points in a couple of weeks, then recovers back to the 19 thousand plus level! This market is surely not good for domestic mutual funds, which would underperform in this kind of a market, due to sitting on cash and not having conviction to be fully invested at these valuations. Mid cap funds have had their own roller coaster ride, with steep falls followed by sharp recoveries.
In this market, the best is to keep new money away from the equity markets. Fixed income still offers around nine to nine and a half percent yield. That takes care of a near 2000 point rise in the BSE Sensex over one year. Sure, does not satisfy greed and perhaps may not beat inflation, but could help to save on any significant downside if the FII’s ( some of it could be Indian money illegally routed through the FII route) decide to take a powder.

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