Has the market bottomed out?

DEBATE

Even optimists suggest a tempering of expectations and there may still be room for a fall.

Nilesh Shah,
Chief Investment Officer, Prudential ICICI AMC

"As a rule, in a growing economy like India, the chances of losing money diminishes as the time horizon of the investment rises"

Is this a temporary blip? Should investors be worried? It is not "timing the market" that is important, but it is the "time-in-the-market", that is. There will always be a difference of objective and investment horizon between an investor and a trader. Over a period of time, markets will reward investors and punish traders. As a rule, in a growing economy like India, the chances of losing money diminishes as the investment time horizon increases.

Hence, we recommend that investors approach equity markets with a long-term standpoint and that they allow their investments to compound over a period of time. For investors who saw a secular market movement for the last three years, the stock market occurrences of May 2006 was naturally a shock.

Sceptics wonder whether the market is headed towards another 2000-01 meltdown. Our belief is that this market correction is not comparable to the tech meltdown. In the days of the tech boom, there was hype around non-existent business models and people emphasised eyeballs over financial numbers. Today, most of the companies have reasonable cash on their balance sheet. The operating profit margins, though under pressure due to higher oil prices, are still maintained due to productivity growth.

Second, we are looking at an economy, which has grown 8.4 per cent in last year and 9.3 per cent in last quarter.

Third, in 2000, many of the IT companies were quoting at more than 100 times forward PE ratio. On the other hand, at the Sensex closing of 9,296 on June 8 this year, the market was quoting at 14.3 times forward earnings based on our internal estimates.

Clearly for an economy which is growing at 7 per cent plus where earnings growth are expected to be between 15 and 18 per cent, 14.3 times forward PE ratio is reasonable. In the words of Warren Buffet, "Most people get interested in stocks when everyone else is. The time to get interested is when no one else is." We believe that any substantial fall below current levels will push stocks to fair to attractive valuations from the previous stretched level. Since there is no significant threat looming over our horizon, investors should hold on to their investments and if their asset allocation permits, they should make additional investments in a gradual manner to average their cost of holding.

The systematic investment plan of mutual funds is a practical solution to timing the market. For SIP investors, every market drop is an opportunity to pick up equity at lower prices. The supernormal returns of the past cannot recur easily going forward unless equity valuations take a serious beating. Hence, investors must rationalise their return expectations from equity. It is prudent to believe that in the long term, equity markets will reflect the earnings growth of companies underlying it.

Alex Mathews,
Head, Research, Geojit Securities Ltd

"If the Sensex falls below 8,490, the next level at which it will find support will be at 7,656 - that is, at the level it was in October 2005"

Indian equity markets are the worst hit by the global meltdown. And both the Sensex and the Nifty are trading below their respective 200-day moving average. Institutional investors, both domestic and international, turned net sellers, while retail investors lost heavily and have been exiting the markets. Volumes in both the cash and derivatives markets have dried up. Open interest in the derivative segment has dropped by more than 60 per cent compared to those in previous months.

Volatility remains high and fear has started controlling the market. Equity market participants are tracking global indices and deciding the market course. If the "Dow is down by 1 per cent, the Indian market has to fall by 3 per cent," predict market men. During the period (from May 11 to June 12), the Dow has dropped by 7 per cent, the Nasdaq by 9.8, the Nikkei by 16.8, Singapore by 13, Korea by 18, London by 8, and the Hang Sang by 11.50 per cent. The Sensex fell 29 per cent.

Normally, the 200-day moving average provides substantial support to the markets. As the indices are below this, we can expect a support at 8,490 for the Sensex, and at 2,530 levels for the Nifty (which are the 33 per cent retracement levels). A sharp bounce back from these levels can be expected "" which may happen before the Friday close. If the anticipating pullback moves above the 2,900 levels of the Nifty, then the up trend may be intact, and the continuous up trend is likely.

On the other hand, if it could not materialise then both the Sensex and the Nifty will find the support level of October 2005 "" 7,656 and 2,307 respectively. As these two support levels are well above the 30-month moving average of 7,214 for the Sensex and 2,218 for the Nifty, the long-term outlook seems to bright. (Normally, growing economies indices will always remain above their respective 30-month moving averages). This is further supported by the fastest growth achieved by Indian indices between May 2004 and May 2006. During the period, the Sensex gained more than 192 per cent. In comparison, the Nikkei gained 65 per cent, Singapore 57, the FTSE 40, the Dow 18, and the Nasdaq 26 per cent.

Transparent trading system, clarity on labour rules and regulations, and the availability of quality papers and their cheap valuations, can once again attract more fund managers to equity markets. Sebi's decision to re-introduce the modified version of stock lending and borrowing mechanism, permitting short selling to institutional investors, the introduction of delivery-based futures and options, and also T+1 settlement cycles can surely bring down the market volatility and further strengthen market efficiency. The only serious negative factor is crude prices. Remember, in the long run "equities are slaves of earnings".