Many investors are waiting for a crash that would throw up a buying opportunity. But as global money continues to flow into our markets, which are robust, a significant decline may not happen. So, what do long-term investors do today?
R Balakrishnan
Our stock markets seem to have got stuck in a range. On the BSE (Bombay Stock Exchange), the Sensex neither breaches the 20,000 mark convincingly nor falls low enough to make buying attractive. Corporate results, being announced for the full year ended March 2011, seem to be in line with market expectations. Voices expressing concern on the valuations as well as the possibility of more attractive opportunities elsewhere do not seem to have reduced the cash coming in to our markets. Valuations are not low, pricing in earnings growth of over 20% year after year. Inflation is sticky and refuses to come down. Gold, silver, crude and global stocks are all moving up. Some metals have lost lustre; but, overall, there is no sense of caution.
As I write this, news is out that KV Kamath is taking over as chairman of Infosys Technologies. This company deserves a re-look for reasons other than valuation. This decade would, perhaps, see the exit of its original team of founders with no dominant shareholder in charge. Some large company could make a takeover attempt on it.
I would like to keep an eye out for companies where families are likely to sell out—Camlin is one. Mergers and takeovers are not possible in the Indian context, unless there is a willing seller. Else, look for takeover attacks on companies like Infosys or L&T (Larsen & Toubro) where there is no dominant ownership. The other factor likely to keep valuations in check is the Reserve Bank of India’s (RBI) actions that would make borrowing expensive. Instead of attacking inflation from the supply side (a long-term solution rather than a quick-fix one), the government is trying to make borrowing more expensive. This will make capital spending more expensive and lead to postponement of projects. Sectors like construction will be adversely affected. So, the RBI will contribute its bit in keeping profit growth down for many Indian companies.
In this environment, consumer companies and cash-surplus companies (like multinationals) will do well. Unfortunately, the stocks in this pack are not exactly cheap. Operating margins of capital goods and labour-intensive sectors are under pressure as increasing wage costs become a concern. Service sectors, like banking and IT, are facing a shortage of competent people and are managing to add headcount by compromising on quality. All in all, there is reason to believe that while things look okay, there is no reason to be very bullish.
Our markets are driven by the inflow/outflow of FII (foreign institutional investors) money and political crises and corruption do not worry the institutional investor. How else does one explain the fact that stocks of companies, whose key executives have been put behind bars, continue to trade at expensive valuations?
Gold and silver continue to defy gravity and are heading towards bubble territories. Excess currency supply and a weak global economy are pushing up gold and silver. Withdrawal of stimuli would surely dent global growth. Rating agencies are threatening to downgrade US and Japan. Food inflation is a global concern. The US is facing jobless growth and a declining currency. But global stock markets are strong. This is a case of excess money in the world trying to find safe havens and some money chasing higher returns from riskier markets like India or Brazil. It looks like a case of too much money going around and no one wanting to miss the party as asset prices rise. In such a context, where global money flows into our markets which are robust, a significant decline may not happen.
Many investors are waiting for a crash that would throw up a buying opportunity. The markets seem to be testing their patience. This market is surely not good for domestic mutual funds which would underperform in this scenario. They will sit on cash and not have the conviction to be fully invested at these valuations. In this market, it is best to keep new money away from equity markets. Fixed income still offers around 9%-9.5% yield. That takes care of a near 2,000-point rise in the BSE Sensex over one year. Sure, it does not satisfy greed and, perhaps, may not beat inflation, but could help to save on any significant downside if the FIIs (some of it could be Indian money illegally routed through the FII route) decide to take a powder.
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