This week inspiration comes from the proverbial tortoise. Why do we say this? The race is all about how we pace it. A Bull Run is after all a race to outlier returns. How we pace our investing is very critical in the current context. Here is our take on pace setting. Reforms will fuel the next Bull Run. With so much to do on reforms, the backlog will take a while to get cleared off. The government needs time, political will and consensus within to push through more reforms. Any act of political brinkmanship will slow the whole process down. Elections will definitely pause reforms for 6 months. This sets the stage for heightened volatility. This makes the pace very important in deciding outcomes. A measured approach will work in turning the volatility in your favour. Negativity will eventually be overcome and one needs to turn it into an opportunity. In fact, we advocate a consistent and measured strategy of buying on bad news. At a time when the gloom is gradually lifting, this strategy seems the safest option. The pace clearly has to be slow and steady. The race will last long. Will you?
A smooth sea never made a skilled sailor.
This results season will give us the answer to an important question. Are the indices over valued? Why do we say this? We believe that this season will probably see the worst of corporate performances and a bottom will be formed. From this bottom, corporate performances will gradually get better. By end- December, the markets will start discounting the earnings of FY 13-14. This will set the stage for a relook at valuations. We are trying to preempt that in this column by a few months. The markets may well preemptively respond too. At today’s close, the Sensex discounts current FY 13-14 EPS by about 14 times. This means that with any further fall in markets or an improvement in earnings outlook, the markets will become increasingly attractive. It is our belief that if both premises happen at the same time, the market’s rebound will be sharp towards the end of the year or in early 2013. Therefore, this results season becomes a harbinger of sorts. It will tell us a lot about what is in store. To get the signals right, we need to look beyond the obvious. This seems to be a time to think beyond actual numbers.
Reforms hold the key. Buy incrementally.