“In the short run, the market is a voting machine. In the long run, it's a weighing machine.”
- Warren Buffett
Wow. What a week! The best week in 17 years for the Bulls and they were partying hard last night. But, now the BIG events are over. The political brouhaha is behind us. The benchmark indices in India hit upper circuit for the first time in history is now in the record books. And, the IPL will finally be over this Sunday. The television screen in our homes will now show more news – biz, political and trading in the US one we reach home. Ahoy, what fun – all glued into the market through the day and night. In short, the euphoria is behind us as we turn the reality road. Not surprisingly – it may appear very different.
For one, investors looking for continuous up move in the Indian equity market would be disappointed. Agreed, India voted for stability. The UPA led government minus the Left at the centre means reforms and growth (and high inflation and taxes). The uncertain market gave the election outcome a thumbs’ up and assigned a new aggressive valuation to India. Irrational exuberance or heavy buying frenzy from those waiting on the sidelines, the 17% freeze in less than 60 seconds, did not allow the ringside viewers to capitalize. The event was discounted immediately by not allowing anyone to fill in the void.
Having said that, one must understand that this time round there were no Bears being squeezed. The fight was up with the Bulls vs those sitting on cash. Historically, everybody loves the Bulls. Yes, we all do (though I am often labeled as a perpetual Bear). Sentiment exodus from pessimism cheered all. But, it created a left out feeling. Reliance AMC is one of them that held up to 33% cash in its equity portfolio. And now it’s playing catch up by deploying the cash, not to miss the Indian growth story. There are other such institutions of foreign institutions and small retail investors’ portraying the left out feeling.
The moot question now is whether this cheer is short lived or would last long. As my friend – Ashu Dutt would ponder over lunch (our staple – dal khichdi and anda bhurji), a significant percentage of your returns come from these mega days. If you are not invested in these times, your returns ought to be sub par. True. So my question here is, “Is it advisable to plough your hard earned money into equities now?”
Being cautious appears to be the best bet. Skepticism arises from the fact that market discounted in one day, what could well have taken a few months. A number of brokerage reports showcase the Sensex trading at 16x one year forward. To my mind, that’s very bullish (remember, the reports are all ‘sell’ side). The 16x multiple for FY10 is based on an assumption of 10% growth over FY09. Currently, the Sensex EPS is around Rs 730 (including provisional numbers). However, a few heavyweight Sensex companies are yet to declare their March quarter numbers. Assuming we end FY09 at Rs 750, India is the most expensive emerging market in the world.
Right now, it’s the same old story. Liquidity is back in the system and too much money is chasing too few stocks. Post the election outcome, I continuously worked up my phone with experts. A head research at one of the proprietary firms told me, “Fundamentally the Sensex did not deserve to be at 21k, neither at 8k. it was to much euphoria followed by too much pessimism. To my mind, the Sensex levels are around 12000-13000. But, who’s going to listen to fundamentalists.”
That’s so true. Euphoria is back. Though it helps all of us survive, the risk-rewards ratio is already biased towards risk. Now that FY10 is fully discounted, most sell side experts have started playing FY11. Now, isn’t that the same bullishness that led to the downfall, in the first place.
For clues, look at what the big guns are doing. Hedge fund investors were busy booking profits while the equity market across the world rallied. So, the rally is being used to exit world over. Economists have started talking about a recovery by the end of CY09 or first half CY10. But, for all you know, recovery could be ‘W’ shaped.
The real dilemma is right up ahead. The argument for the bullishness is India’s growth story. India will continue to show positive growth, while the world contracts. The domestic story helps here. The argument against is if the world contracts, valuation multiples will move down. Investments will be low and exits to fund domestic growth back home would be evident.
To conclude, stay skeptical. Several mid-caps are playing catching up. Valuation premiums in these counters have jumped aggressively. In the previous week, some counters have jumped 40-90%. Operators are back in the fray. Use this opportunity to exit fundamentally weak counters you were stuck with and enter quality stocks. After all, opportunity, for once, has knocked twice.
Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.
- Warren Buffett
Wow. What a week! The best week in 17 years for the Bulls and they were partying hard last night. But, now the BIG events are over. The political brouhaha is behind us. The benchmark indices in India hit upper circuit for the first time in history is now in the record books. And, the IPL will finally be over this Sunday. The television screen in our homes will now show more news – biz, political and trading in the US one we reach home. Ahoy, what fun – all glued into the market through the day and night. In short, the euphoria is behind us as we turn the reality road. Not surprisingly – it may appear very different.
For one, investors looking for continuous up move in the Indian equity market would be disappointed. Agreed, India voted for stability. The UPA led government minus the Left at the centre means reforms and growth (and high inflation and taxes). The uncertain market gave the election outcome a thumbs’ up and assigned a new aggressive valuation to India. Irrational exuberance or heavy buying frenzy from those waiting on the sidelines, the 17% freeze in less than 60 seconds, did not allow the ringside viewers to capitalize. The event was discounted immediately by not allowing anyone to fill in the void.
Having said that, one must understand that this time round there were no Bears being squeezed. The fight was up with the Bulls vs those sitting on cash. Historically, everybody loves the Bulls. Yes, we all do (though I am often labeled as a perpetual Bear). Sentiment exodus from pessimism cheered all. But, it created a left out feeling. Reliance AMC is one of them that held up to 33% cash in its equity portfolio. And now it’s playing catch up by deploying the cash, not to miss the Indian growth story. There are other such institutions of foreign institutions and small retail investors’ portraying the left out feeling.
The moot question now is whether this cheer is short lived or would last long. As my friend – Ashu Dutt would ponder over lunch (our staple – dal khichdi and anda bhurji), a significant percentage of your returns come from these mega days. If you are not invested in these times, your returns ought to be sub par. True. So my question here is, “Is it advisable to plough your hard earned money into equities now?”
Being cautious appears to be the best bet. Skepticism arises from the fact that market discounted in one day, what could well have taken a few months. A number of brokerage reports showcase the Sensex trading at 16x one year forward. To my mind, that’s very bullish (remember, the reports are all ‘sell’ side). The 16x multiple for FY10 is based on an assumption of 10% growth over FY09. Currently, the Sensex EPS is around Rs 730 (including provisional numbers). However, a few heavyweight Sensex companies are yet to declare their March quarter numbers. Assuming we end FY09 at Rs 750, India is the most expensive emerging market in the world.
| | 2009F | 2010F | | 2009F | 2010F |
| | PE | PE | | EPS growth | EPS growth |
| | x | x | | % | % |
| | 35.5 | 20 | | 17.6 | 39.1 |
| HK | 16.8 | 14.9 | | 15.5 | 20.2 |
| | 19.4 | 18.1 | | 10.1 | 16 |
| | 16.3 | 11.7 | | -1.5 | 9.1 |
| | 16.1 | 14.5 | | -1.7 | 9.9 |
| | 14.6 | 13.3 | | -12.3 | 11.5 |
| | 14.5 | 13.2 | HK | -17.9 | 13.2 |
| | 12.4 | 10.1 | | -18.6 | 80.8 |
| | 11.4 | 10 | | -20.9 | 10.3 |
| | | | | | |
| | 2009F | 2010F | | 2009F | 2010F |
| | PBV | PBV | | Div Yield | Div Yield |
| | x | x | | % | % |
| | 3.7 | 3.2 | | 4.2 | 4.7 |
| | 2.6 | 2.4 | | 3.6 | 3.7 |
| HK | 1.9 | 1.8 | | 3.3 | 3.6 |
| | 1.9 | 1.9 | HK | 3 | 3.3 |
| | 1.7 | 1.6 | | 2.9 | 3.2 |
| | 1.6 | 1.4 | | 2.8 | 3.2 |
| | 1.4 | 1.3 | | 2 | 2.4 |
| | 1.3 | 1.2 | | 1.3 | 1.2 |
| | 1.3 | 1.3 | | 1.1 | 1.8 |
| Source: CNBC TV18 Analysis | |||||
Assuming a 10% growth for FY10 (though it sounds optimistic), this is how the Sensex matrix looks like this.
| Sensex Levels for FY10 | Pessimistic | Realistic | Optimistic |
| EPS Growth (base Rs 750 for FY09) | 10% | 15% | 20% |
| Fwd P/E | | | |
| 15x | 12,375 | 12,938 | 13,500 |
| 18x | 14,850 | 15,525 | 16,200 |
| 20x | 16,500 | 17,250 | 18,000 |
| Source: CNBC TV18 Analysis | |||
Historically, India trades at around 15x one-year forward and with 100-200bps higher risk premium than most emerging markets. Factoring that too, India continues to remain expensive now. At 15x, investors are assuming EPS to rise more than 20% over FY09. The argument comes from the fact that RPL will be merged with RIL to pump up valuations. The other argument is the recovery. But, all that sounds a bit stretched. Alternatively, at flat growth for FY10, Sensex is trading 19x. The writing on the wall is loud and clear – India is expensive.
Right now, it’s the same old story. Liquidity is back in the system and too much money is chasing too few stocks. Post the election outcome, I continuously worked up my phone with experts. A head research at one of the proprietary firms told me, “Fundamentally the Sensex did not deserve to be at 21k, neither at 8k. it was to much euphoria followed by too much pessimism. To my mind, the Sensex levels are around 12000-13000. But, who’s going to listen to fundamentalists.”
That’s so true. Euphoria is back. Though it helps all of us survive, the risk-rewards ratio is already biased towards risk. Now that FY10 is fully discounted, most sell side experts have started playing FY11. Now, isn’t that the same bullishness that led to the downfall, in the first place.
For clues, look at what the big guns are doing. Hedge fund investors were busy booking profits while the equity market across the world rallied. So, the rally is being used to exit world over. Economists have started talking about a recovery by the end of CY09 or first half CY10. But, for all you know, recovery could be ‘W’ shaped.
The real dilemma is right up ahead. The argument for the bullishness is India’s growth story. India will continue to show positive growth, while the world contracts. The domestic story helps here. The argument against is if the world contracts, valuation multiples will move down. Investments will be low and exits to fund domestic growth back home would be evident.
To conclude, stay skeptical. Several mid-caps are playing catching up. Valuation premiums in these counters have jumped aggressively. In the previous week, some counters have jumped 40-90%. Operators are back in the fray. Use this opportunity to exit fundamentally weak counters you were stuck with and enter quality stocks. After all, opportunity, for once, has knocked twice.
Disclosure: The author is not permitted to trade and/or invest into the equity market directly or indirectly, apart from investing (long only) in mutual fund products. His equity exposure is only to the extent of ESOPs granted by the employer.
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