A situation where earnings growth is rising and projected to continue rising, while share prices are falling, is unusual. We can see it happening now, and it could continue, given the panic in Europe. Normally, one would expect long-term investors to be happy at the chance to invest in profitable businesses at lower prices.
But, little about the current situation is normal. The last time there was a crisis of these dimensions in 2008, it triggered a 15-month bear market that knocked more than 50 per cent off index values. More pertinently, it retarded Indian GDP growth by at least 1.5 per cent and had an adverse effect on earnings over a two-year period. Several things may go wrong with the current projections for India if the European situation gets worse. Indian exports, which are still depressed, could spend a further indefinite period in the doldrums. Second, Indian businesses looking to tap overseas finance (notably real estate and telecom) will run into reluctance. Third, domestic consumer spending itself could drop if white-collar increments are frozen. Last, there might be an absolute hard-currency collapse and that would have consequences that are impossible to assess. So, should Indian investors be buying under the circumstances? On balance, I'd say yes. The absolute currency collapse is not very likely to happen and, under other circumstances, the Indian economy will continue to recover gradually, if not at the rates that were optimistically projected before the Greek tragedy.
But, any buying should be very cautious and done in staggered fashion. Here are some possible sign posts. Prices could drop or remain depressed for several months. Hence, slow systematic buying strategies will yield better returns by lowering average price of acquisitions. Above all, don't commit funds that you'll need to touch for several years. If the index is down another 20 per cent, a year down the line, you want to be able to reduce your average cost of acquisition rather than be forced to sell out to cover other expenses.
Second, avoid companies that are heavily dependent on exports or on debt infusions. In the first case, the reasons are obvious — export growth will be slow or negative. Debt will also be very hard to come by and expensive as well. Expansion plans everywhere are likely to go on hold. Third, look for attractive valuations with regards to the current balance sheet, rather than strong growth prospects. A low-debt company that is available cheap (in terms of a low current PE, PBV, etc) is less likely to suffer dramatic erosion in valuations. Fourth, don't expect further stimulus packages from the Government of India — it doesn't have the resources.
The author is a technical and equity analyst
