Tag Archives: indian economy

Play It Safe

“Large caps look inexpensive compared to small and midcaps.” A value investing peer said this in a rather complaining tone. To investors who made most of their wealth buying small and midcaps, these are troubling times indeed. The situation has remained so for the past year. Investors have been struggling to cope with this. Stocks were expensive and people were buying them as if there was no tomorrow.

Nothing contrasts this frustration more starkly than the bold and aggressive SIP flows into the same space from retail investors. Investors have been pouring money into this space based on past returns. While experienced investors struggle to deploy money in the space, public investors were partying with the monies of the retail investor. But, the first signs of cracks are clearly there. For starters, stocks which were not owned by mutual funds have corrected sharply. This gives a false impression that fund owned stocks are safe. But, there is more to this than meets the eye. Fund owned stocks in the midcap space will correct when the funds are not in a position to support their prices. It is fairly safe to assume that day shall come.

Meanwhile, the market struggles to find defensive investments in equity. Portfolios will take an increasingly defensive stance and returns over the next 12-18 months will probably see better traction in defensives. Aggressive investment strategies will probably take a break. The time is ripe to stoutly defend portfolios.

 

Events vs earnings – An investor perspective.

An earthquake of Richter 8.9. A tsunami within hours; followed by the grave news of explosions in nuclear reactors. Japan is in the midst of an unprecedented crisis. In this series of unexpected happenings, event risk returned to haunt global stock markets.

In a globalized world, our markets ought to have been impacted by the 20 pc drop in the Nikkei over two trading sessions. Many earlier events have seen our markets mirroring global trends. Trading on our bourses however seem to be relatively calm. The enormity of the problem is still sinking and selling may well happen in the days ahead. The crisis in Japan will impact global investor sentiment in the near term as money gets reallocated and risk averse capital takes flight to safe havens. Markets will head lower till investors tire of selling and sheer selling fatigue will probably reverse sentiment. It is hard to predict when this will take place.

What should Indian retail investors be doing when global sentiment is weak and dominated by fear ? Should we follow the global trends and stay out or should we make use of this opportunity thrown before us ? My view is that we must put events aside and focus on the earnings of corporate India. In the long run, you will agree that it is the earnings that determine the valuation of businesses.

The Indian economy will face a limited impact as exporting businesses may see some uncertainty in the near term. But, the overall impact of the Japan crisis on our economy is limited . In fact, the price trends in commodities is more important to us in the near term. The reasoning is simple. India is a commodity centric stock market. Our index pivotal outside of banking and IT are mostly commodity-centric businesses. The commodity producing sectors like metals, petroleum refining, coal, petrochem and oil exploration have a high weightage in our indices. Commodity consuming businesses like power, cement and auto also have a reasonable weightage. High commodity prices are not good for our economy as we need more forex to meet our oil and natural resource requirements. This will raise our costs and impact consumption. Therefore a fall in the prices of major commodities like oil, coal, iron ore and metals will ease the cost structure of several businesses. The fiscal targets of the country will also be met only if the prices of commodities head lower. Overall , the index earnings will have greater stability in a scenario of lower commodity prices and earnings growth is only subject to this happening. If commodity prices cool, inflation will also reduce and interest rates will start heading south. This will lead to sustained consumption and several key sectors like cement , auto, power , aviation and petroleum will see profitable growth. Eventually, this will result in earnings expansion returning to our companies. Earnings expansion will eventually see the PE growth reflect in our stock markets. It is in this scenario that markets will turn bullish and hit new highs.

In summary, investors must pay greater emphasis to earnings and allow events to die down . The thrust should be on understanding the impact of commodity prices as they enter a phase of high volatility. Rather than getting perturbed by the short-term fluctuations in commodities , investors must read the long-term trend lines . If the trend in commodities is decisively down, investors can return to buying stocks of commodity-user companies . The consumption story will revive and we will see the markets hitting new highs. The volatility in the interim should be patiently watched out and investors must conserve their resources to buy India-centric businesses when commodities cool down. Earnings and not events must be the decision variable in our investing process.