INDIAN GROWTH STORY – WAS IT A BUBBLE?
There is a big question raised on the fundamentals of our economy. For the economy, how soon the financial problem reflects on businesses? The way the news are floating around, it seems the impact is quite instantaneous and pretty fast for the speed of financial world. It is difficult to presume the speed to be so fast. The asset bubble had been happening for quite a few months and in all probability is older than a year.
In my analysis there was a marked shift in value of the companies listed on the exchange. From a period 2004-2007 the growth in most industries had been phenomenal. In other words there was tremendous value in equities beginning 2004. These equities got fairly priced as time went by and there was still value left in Indian equity. The problem precisely began when optimism was overriding all possible practical understandings. From 2007-2008 the value of stocks (not the market price) remained same and in some cases even saw a marked drop. There could be many explanation for this and the one most plausible is the effect of inflation on raw material inputs. The biggest hit was to metal industries. Metals were undervalued when the bull run began a few years back and in spite of the drop in their share prices now, they are still undervalued. Metal had its run in profitability before 2005, up to this period the returns or profits on capital employed was healthy. As capex increased the capital base increased which is yet to show on profitability and therefore explains the lower return on capital.
Right now there is a view that stocks are undervalued. These statement needs lot of introspection. I am unequivocal and say all equities are still not trading below value, even in this falling market there are equities which are trading above value. There are quite a few equities which are trading below their value and these are corporate which had a good increase in profitability through 2007-2008. I have advised my clients to invest in them.
I am still optimistic of our economy and the nascency of this belief is that we as a nation can’t help it and need to boost investments and though the cost is inflation it cannot be held back for long.
Let me give an example, the growth in cement industries has been around CAGR 7% from 1994-2007 and for the same period Heavy goods has grown 25%, Steel and Aluminum at 3% each. Now there is an anomaly here. There is something about the growth not being similar across industries. This leads to imbalance in growth in dependent industries and therefore we find some equities are overvalued and some undervalued. This will be, invariably rectified albeit with strong policy recommendations.
There is demand which is latent and riding the waves of business cycle. The cycle is at low ebb now and will soon take a ride upwards. The current liquidity crunch is hampering growth and could further dampen investor confidence; the fact is we are aware there will be unprecedented growth but the bet is the timing of when the cycle turns and policy changes the government is ready to dare in the times to come.
- by Santosh Shetty
Time to start buying again!
(Article by Robin Swami – an ace blogger in http://www.moneycontrol.com)
Searching for direction in the market? This article is for you!
The fall in the Indian Equity Market is due to systemic global risk that is common to entire market and not specific to Indian Market. This has happened due to financial system instability caused or exacerbated by idiosyncratic events or conditions in financial intermediaries elsewhere (read US and Europe). Now that the growth in these developed economies have tappered greatly, the Emerging Markets will feel only ripple effects, which will however be compensated by domestic demand. Therefore, if both developed and emerging markets have fallen propotionately, the emerging markets, with their relatively higher growth rate, should send buy signals much sooner.
Out of these Emerging Markets India has reached the point where one can press BUY button and GO LONG. Now, I will elucidate the reasons. Indian GDP rate “may” fall marginally, but it will still remain the second fastest growing major economy. The dollar rise will make exports competitive once again. The negative effects of dollar rise will be adjusted by the falling crude price. As I mentioned earlier, the fall globally has been initiated by the over ambitious finacial players. The Indian finacial system is one of the most robust in the world. The government and RBI have shown commendable speed and sense of responsibility by taking timely monetary and fiscal measures like CRR cut etc. (If sources are to be believed, more are on cards – something like a mini budget). The pay commisssion and loan waiver will further fuel demand.
I would say, for India, it has been a bear market within a long term bull run (extending till 2040) caused by external factors beyond its control. This is definitely reason for Indian investor to be cheerful and look for buying opportunities, whenever they apear.
I consider that Indian market is at its bottom or very close to it. At this point I would like to bring in a fact which bring out that India is already over sold. We all know that the US market is close to recession. But legendary investor Warren Buffet has called BUY in the US equities. These are some of his famous words which he uttered on 17th october 2008. “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.But fears regarding the long-term prosperity of the nation’s many sound companies make no sense,” he said. Buffett said major companies would suffer earnings hiccups, but added they “will be setting new profit records five, 10 and 20 years from now.”
If it is so for the US economy how much more true for an economy which is the emerging growth engine of the world?
It is time for us to stop looking at global indices for cues and start picking up equities from Indian bourses. The universe of stocks has become large. But I would recommend investors to buy large cap stocks with strong fundamentals. The following are my recommendations:-
Reliance Industries
ONGC
SBI
Infosys Tech
L&T
Reliance Com
Sail
Short term investors can look for 20% return (7-15 days). If you can hold it till December, expect close to 40% returns. This level I believe is close to true value. If you hold for 8-12 months, then you are likely to get returns close to 100%
True value of sensex is close to 14000. I used to talk about growth premium, which India truly deserves. If you consider this then the value is 17000. This level may be achieved in 8-12 months. But I strongly feel that sensex will very soon revert to 12000 levels. There will be very strong resistance at 10000 in downside(similar to the one we had on the upside).
It is rumored that a US based billionaire investor has heavily initiated long postions. If you (Indian Retail Investors) have not sold your stocks so far, please do not make the mistake of selling them now. If you have cash, start accumulating and building your portfolio in a gradual manner. 3-4 years down the line we may see levels of 30,000.
Happy Investing Folks! Cheers, finally bottom is in sight!!