A Bear market is not an illness.
A Bear market is not an illness.
"How long do you think these markets will last?" "When do you think
things will improve?" One can understand a first time stock market investor who
has put in his hard earned money in the markets at its peak asking this
question nervously. I am amused to see even so called market experts and
pundits debating this question feverishly on business television and at all
formal or informal gatherings.
Its almost as if a normal market is a market that goes up everyday
and that a market which has fallen is a sign of some illness that needs to be
cured or worse just endured.
Seasons are there in the stock markets too. Trouble is, unlike
seasons how long the capital market winter will last is always difficult to
say. This should be no reason to complain as money is made in the markets only
because of this uncertainty. Financial instruments when they deliver
predictable fixed returns exist only in the debt market.
It would help investors to keep a cardinal rule of finance well
understood at all times. Any return higher than a G-Sec is in direct measure
proportional to the risk the instrument carries. All investments with an
unlimited upside potential also have an equivalent downside possibility.
Just as water finds its lowest level, money gravitates towards
chasing maximum returns. Emerging market companies have been growing at a much
higher multiplier to that of companies in developed markets, which are
saturated and returning anemic returns. The present value of the business is
well understood; the price of a stock is due to the future getting discounted
now. Different companies across different markets will have different
possibilities of growth and this reflects in the P/E multiple that is applied
to its known EPS of a usually accepted benchmark of one-year forward consensus
estimate.
When the world markets are in positive territory and the general
mood optimistic we have seen emerging markets like India trade at a substantial
premium to the global markets. United States, which has been at the epicenter
of this financial earthquake and has shaken up markets globally; has actually
been ironically one of the best performing markets. Indian markets according to
S&P/Citigroup Global Equity Indices, the one-year forward P-E Consensus
estimate was 14.98 at the end of August; which is a respectable 38.5% premium
to that of emerging markets as a basket. When compared to other emerging
markets the Indian markets are doing very well but they have turned cheaper
than the US markets which trade at 15.23 times one-year forward.
What this means is that FIIs have re-rated their investment flows
and downgraded the emerging markets as a basket while flocking to the safety of
a mature market with greater depth like the US. The trend in the Indian market
is consistent since January, FIIs have been net sellers, selling about
$8Billion and domestic institutions like Life Insurance and Mutual Funds have
been absorbing their sale. With the softening of crude, one of the biggest
scare of the Indian market has been tamed, inflation though remains way out
proportion to the central bank tolerance levels but on the positive side the
government has demonstrated that they have the stomach to raise interest rates
and tighten liquidity to tame this monster.
The market is compellingly attractive below 14000 and fairly priced
at 15500 and it may keep testing these levels but in the near term may not be
able to decisively break out of either. What it means is that it is time to
identify the stocks that you like and wait for them to reach the strike price
that you have set, invest and then patiently wait. This season of winter too
will change and it will be spring once again and most will look back at today's
times and wish they had invested because then they will have the benefit of
hindsight.
Aseem Dhru
September 05, 2008
ekamber
The greatest lesson in life is to know that even fools are right sometimes.
---Churchill
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