Market turmoil: Our view on large-cap stocks (indian stock market)
'It's all in the mind' thus goes the saying. And the mind fears 'fear'. A four-letter word that made man avoid dangers in times primitive when he was at a very nascent stage of evolution and was still hunting down animals and wandering in jungles. However, the same four-letter word has now turned into a bane. He is sensing danger where little exists and making him do silly things like selling quality stocks for some concerns, which although look real in the short run are likely to abate in the long-run.
The past two months have probably been one of the most turbulent Indian stock markets have ever seen since the start of the bull-run in mid-2003. During this latest period, first there was irrationality surrounding the country's largest ever IPO. And then there was a situation of fear that gripped participants on the back of global economic issues, as also the failure of this mega public issue.
But, has the 'world come to an end'? We believe No!
The Indian stock markets are reverberating with many panic cries. So are the markets across Asia and beyond - all on the back of concerns that the US economy is going into a recession (if it has not gone into one already) that will have a widespread impact on the entire world economy. Actually, things are not really certain now. They never were as we had been indicating to our readers in the recent past.
But the intensity and the velocity with which the turmoil have happened, was not really predicted. And, as it happens in uncertain times, investors are pulling out from equities. The events that have unfolded over the past few weeks seem to have shaken investors' belief whether the stock markets, after an almost 5-year dream run, are actually a pretty 'risky' place. Well, they definitely are!
What's our view?
In such a scenario, one should expect the sentiment to become very pessimistic. One should also expect the markets to be volatile. However, once again we would advise investors to have the long-term horizon in mind. The reason we keep harping on our long-term attitude towards investing in stocks is because of a few reasons, explanation of which we believe is in order.
Crisis like the current one may be different in its name and the magnitude of impact than the previous ones but all of them achieve the same task inflicting huge financial losses especially on the speculators/
However, if the past few years were any indication, what a huge mistake some of these people would have made by missing one of the biggest rallies on this side of the 21st century. They were making the same mistake of not looking into the long-term but getting swayed by near term panic selling and hysteria.
Now, here is the most prominent reason why investing in equities for the long-term makes more sense during the current times of pessimism. The froth of excessive valuations has been somewhat cleared. Stock prices have retreated to more realistic levels. While there are concerns regarding the sustenance of earnings growth for corporate India, we continue to believe that a 7.5% GDP growth and 15% corporate earnings growth on a compounded annual basis is not really a far fetched dream if you were to have a 3 to 5 year investment horizon.
And you can expect similar returns (around 15% annually) from a well-balanced equity portfolio during a similar time period. While there is no denying the fact that valuations still remain fairly high in many stocks across sectors, on a broader basis, we can find many good quality companies coming down to now trade at attractive levels.
While it might not be a one-way ride for stocks going forward (it never is), what is more important to note is that equities can provide attractive inflation adjusted returns in the long term. You just have to be rational in your choices and not follow the herd, and you need to value stocks not beyond any accurate or rational reflection of their actual worth.
This is not to say that your equity investments cannot legitimately enjoy a huge leap in value, but this leap should be justified by the prospects of the underlying companies, and not just by a mass of investors following each other.
What to expect?
Click here to read our latest view on the last fifteen recommendations that we have made through our Stock Select service.
|Stock Select Recommendations|
|Company||Date||View||Price||Target price||Current price*||Change||Current view|
|Bank of Baroda||29-Dec-07||Hold||456||550||273||-40.0%||Buy|
|Union Bank of India||23-Feb-08||Buy||188||250||148||-21.3%||Buy|
Overall, we remain positive on the India growth story from a 3 to 5 years' perspective. Earning a compounded annual return of 15% from a well-balanced equity portfolio should not be a difficult task during this period. However, asking for more than that, say 30%, 40% or 50% (as some mutual fund sales team have been found promising gullible investors) will be like asking for the moon