Equities have traditionally outperformed all asset classes over a longer period of time. In a growing economy like India, exposure to equities is essential in the overall asset allocation of every investor. Of course, many investors know this. But there are still many others who haven't joined the 'ring' as yet, waiting for an opportune time. In fact, the recent correction from the heady level of 21,000 is an opportunity that fist-timers need to capitalise on.
Greed and fear take over
Yes, the times are uncertain and markets have been highly volatile. But remember most successful investors have made money by investing in uncertain times. That's because perceived risk and actual risk seldom go hand in hand. At 21,000 Sensex level, the actual risk was much higher but optimism was at its peak.
Similarly, at around 15,000-16,000 levels (with a correction of close to 25% in the benchmark index and that of around 30-40% in many fundamentally sound stocks), the actual risk was far lower but pessimism was written all over. Clearly, sentiments tend to overshoot fundamentals in both the directions.
Also, most retail investors tend to follow the herd and burn their fingers in the process. In January, we had advised some of the investors to book profits in stocks such as Alphageo, Jaiprakash Associates and some realty stocks that had appreciated by 60-80% within a couple of months.
However, the euphoria was such that investors were not ready to understand and believed that the markets could correct to the extent of 25-30% from the current levels. In fact, even first-time investors felt that the market was set to touch 28,000 levels in a few months.
It was greed that had taken over rational reasoning and fundamentals were thrown out of the window. And with what effect?
Is India story intact?
Notwithstanding the recent correction and continued volatility, the long-term bullish outlook on equities in India remains intact. Fundamentally, even after factoring in the recent deterioration in the macro-economic environment domestically, India would continue to be among the fastest growing economies with a growth of around 8% in 2008-09. In its recent annual policy review, the Reserve Bank of India has projected a gross domestic product (GDP) growth of 8-8.5% for the fiscal 2008-09.
The GDP growth would be supported by the continued upturn in the investment cycle, spending on infrastructure and industrial capital expenditure. On the other hand, the demand push will be aided by boosting consumption through a lower personal tax and the implementation of the Sixth Pay Commission's generous recommendations.
India Inc is showing signs of moderation in growth due to reasons such as capacity constraints, execution delays and firm interest rates. However, going by the Q4 results, corporate earnings are likely to remain healthy. The performance of some companies in capital goods, auto and cement sectors were below expectations.
However, many pharma companies (Nicholas Piramal, Cadila), private sector banks (Axis Bank, ICICI Bank) and telecom companies (Bharti Airtel and Idea Cellular) have exceeded street expectations and positively surprised the markets.
Over the longer term, we estimate the Sensex companies would report a reasonably healthy compounded annual growth rate of 18-19% over financial years 2008-10. So, fundamentally, the Sensex' valuation is reasonably attractive at 16-16.5 in the financial year 2009 earnings.
Where are the foreign funds?
Liquidity has been an important factor driving the equity markets in recent times. Domestically, the inflows to equity mutual funds and equity related insurance products have remained robust in the last quarter. However, the foreign investors have been net sellers to the extent of $3.2 billion in Q1 of CY2008. I see this as an aberration and expect the foreign institutions to return to the emerging markets in general and to India in particular, once there is mellow-down in risk aversion globally.
The reasonably decent Q4 results and expectations of a normal monsoon this year should provide the required trigger for bringing about a change in the overall market sentiment. Consequently, notwithstanding the volatility in the short term, I believe that Indian equity markets will provide handsome returns and outperform the other asset classes in the longer term. Keep the faith.
The writer is the CEO of Sharekhan