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For an investor in India, it is probably one of the worst times with asset classes across the board taking a hammering. An equity investor feels that he is the worst hit as he has fewer choices to take shelter in. But the fact is, we have just begun our descent.
Markets are still within 10% of the year’s high and 12% of its all-time high level. On a year to date basis, Nifty has lost only 6.29% of its value and 4.6% in a month and 3.7% in a week. In other words,most of the fall has been recent. But if you speak to anyone in the market one gets the feeling that we are in the gloom period for a really long time.
Markets have for a long time run far ahead of its valuations. While there was gloom in the economy, markets were booming. The mismatch was thanks to the deluge of global liquidity. For the Indian retail investor, he never had much money in the first place since the Lehman crisis. For the brave ones who invested feeling that FIIs would come to their rescue, the currency crisis has given them a reality shock.
A retail investor generally dabbles in ‘mid-cap’ or ‘small-cap’ stocks. The ‘mid-cap’ stocks measured by the ‘mid-cap’ index have lost 13% in a year and 11% in a month highlighting a bigger loss to these investors. Does it mean that the worst is over and one can start investing again? While it is nearly impossible to pick up the bottom of the market, picking the direction right is enough to make decent amount of money.
Direction of the market is decided by a number of factors like liquidity, valuation, growth scenario, overall economic scenario, market psychology among others. On the liquidity scale, we have clearly crossed the top. All efforts by the rejuvenated finance minister have turned out to be fruitless, which is clearly visible in the flight of capital. Growth in western markets has led to global capital moving to those countries and out of developing markets.
On the valuation band, the BSE Sensex EPS at 1300 for FY14 makes the index trading at 14.3 times which is the long term average. However, given the economic scenario and the government missing from governance, chances are the lower band of the valuation which is around 11 times forward earning can be touched. In terms of Sensex, this translates to a BSE Sensex level of around 14,300. That’s nearly 23% away from current levels. Remember markets have fallen just 6.3 % from its recent peak, we have covered only one-fourth of the distance.
As far as growth scenario is concerned, government has ensured that there is little to talk about. Recent takeaways from analyst meets also point out that there is little that corporate India is expecting from this government till elections. If at all, announcements will be populist, something which will hurt the economy further. There is also the small window before state elections, which means fewer projects will be announced. Thankfully there is a huge gap between announcement and implementation of policies by this government. Thus the damage on the economy can be limited.
Global markets are not yet out of the woods though money has started flowing in their direction. The main reason being there is an active government which is taking and implementing policies to improve their economy. Most of the economies, led by the US are encouraging growth and employment by preventing jobs from being migrated to other countries through outsourcing.
Unfortunately Indian government’s policy of attracting foreign capital is encouraging outsourcing and thus affecting job growth.
Unfortunately Indian government’s policy of attracting foreign capital is encouraging outsourcing and thus affecting job growth.
Broking firms who have recently gone on road shows for raising funds for Indian markets say that there is little interest in Indian markets. They have given up on India, thanks to its governance.
In short if some of the biggest funds do not feel the need to invest despite the fall and we are long way off from safer shores on parameters like liquidity, valuation and growth, there is little reason for an investor to board a train coming in the wrong direction.
