Sunday, August 21, 2011
Indian Stock Market Outlook
In an attempt to help investors learn how to invest smartly and reap the benefits, "The all new Investor Camp" presented by CNBC-TV18 and Trustline with Udayan Mukherjee, one of India's biggest investment expert, Nilesh Shah President - Corporate Banking, Axis Bank, talks about the risks and the returns in various types of schemes as well as answers all stock queries posed by investors..
Udayan on Markets
CNBC-TV18's managing editor Udayan Mukherjee wishes he could say the pain in the market is close to the end and it will get over very soon but he feels there is probably quite a bit of pain left in the market. It doesn’t have the appearance of something which is over. It becomes a question of time horizon finally because this will not get over in two-three months. The question which everybody is asking should we be buying now and he thinks the counter question should be - what is your horizon?
“If your horizon is three-four months and if you are trying to catch a bottom just to trade then maybe the time is not here but if your horizon is three years sure you could buy and buy more if the market falls and still make a lot of money in two-three years time,” says Mukherjee.
Right now, he says the complexity of the problem is such that it would be foolish on anyone’s part to go out and say - it is brave to say but this is not 2008, we should buy right now because the market will turn from 4,800 or 4,500 but that is just throwing a dart in the dark. None of us know where we will end up.
Memories are still raw from 2008. For a lot of people who had midcap positions from 2008 to2010 are still losing money. So that two year horizon has been tested because of the events of that year. Things have changed in the last fortnight. In the early part of August or late July this year, there was much higher conviction that the market has limited downside.
Everybody would have told you 4,800-5,000 but today they will hesitate to say that we have a bottom in place already because things are moving. All of us recognize that the problem this time is very different from 2008 and all bear markets are different. Having gone through the 2008 experience he asks if we should be presumptuous enough to say that markets cannot fall more from here.
“Look at so many stocks and how they have fallen off in the last week-10 days and who would have thought that we would have seen those prices already. At this point you shouldn't get too bearish but you should not presume too much as well because that can be quite dangerous as we saw in 2008,” says Mukherjee.
He further says, “You come out and say there is great value, stock is at ex-PE and that PE halves so then you are left holding that baby. But for people here its their hard-earned money and I hear a lot of people who give out advise like just go out and buy today. You know you need to be a bit more cautious than that because we just don’t know what is going on.”
A country is bigger than a company. We have never faced a European sovereign situation before. This experience will teach us what that crisis can evolve like. Before 2008 we never knew what a failure of one financial institution could do to the world. So today we don’t know what the failure of a country can do to the world. “Horizon is the key. If you are taking bets here you have got to tell yourself there will be pain and I’ll make money two-three years down the line but not immediately,” he says.
While markets have been correcting, the shock and awe for a lot of people happened this week because of the way the mid-caps just collapsed. Things look great value right now but things looked great value last week as well. Mukherjee talks about Lanco which a lot of people are stuck in and it’s a raw nerve because a lot of people bought it at Rs 28 and Rs 30 saying there is great value in that stock and how much lower can it get? “It’s Rs 15 now so you lost 50% of your wealth in 10 days or 15 days. As the old wisdom don’t try and bottom fish stocks which you don’t have assurance of quality in,” he cautions.
Everyone saw what happened to Educomp over the last couple of days. Something comes up; stock gets beaten up perhaps 30% before you know it. Those things probably don’t happen to the HDFC’s and L&T’s of the world which is why they fall much less in the declines.
The temptation, says Mukherjee, is to buy Rs 15 ticket price which will go up to Rs 25 and you will quickly make 60% but the fear of downside should be more right now then the greed of upside immediately from a trading perspective. There is safety in quality at this point. Midcaps have tremendous value but who is to say that you won't find it at 0.5 X of that value in the next few months.
Below is a verbatim transcript of Nilesh Shah’s interview with CNBC-TV18's Mitali Mukherjee.
Q: For a lot of people, this was their investment area, 5,000-5,100 is when they believed they should start committing cash and that has been violated. Is it your sense that right now it’s the best time to be taking that investment call or do you think this is the time to wait for this to play out?
A: If we say that this is not the time to invest then we are ignoring the basic fundamentals of valuation. Of course, markets are falling and probably there is no prize for guessing where markets will open on Monday. But this is the time to catch the falling knife. At 13.5-14 times one year forward earnings, at 2.2 times price to book if you don’t buy then when will you buy? Can markets go down 10-15% from current levels? The answer is, yes, it is possible but what is the probability of that? I am sure that not all of us have fully invested into equities.
The fact is that in a rising market it is always easy to invest and in a falling market it is always difficult to invest. My request will be keep on nibbling in the stock market. Don’t buy on a day when the market is up but buy on a day when market is falling. You will get plenty of those opportunities over the next three-six months. It is unlikely that the way markets have fallen they are going to go up. If you build your portfolio in this downturn, probably you will see a far better and handsome return over the next 18-24 months.
Q: The big question right now is do I go with fixed income, where I get 9.5%, I can sleep at night, no problem or do I go with equity where there is upside but there is downside risk as well?
A: The answer remains in asset allocation. Today, you have a great opportunity to invest in fixed income as well as equity and probably not so great opportunity to invest in commodities like gold because of the sharp run-up which has occurred.
Real estate has, especially, in this part of the town has gone up quite substantially. So, probably gold and real estate are not as attractive as they were in 2008 but equities and fixed income are far more attractive today compared to what they were in 2008. Please go ahead and invest in bonds issues, which are happening at 12% plus yield.
You have some good 10-year plus perpetual bonds available in the market and they are all giving about 11-11.5% yield. It’s a fairly attractive rate of return. If we see the long -term return of equity, that’s about 15-16% and if you can get 11-12% in good quality credit companies then its worth capturing, no doubt about that.
The floor was thrown open to the audience who asked Nilesh Shah of Axis Bank questions.
Q: Banks all over the world, say Bank of America and all those banks, they trade at price to book of around either 1 or say 0.60. This is happening without any loan growth. What valuation should we give to the Indian banks who even at a conservative basis can grow at 10-15% of their loan growth. So can I assume something between 1 and 1.5 as a good price to book valuation?
A: There is always going to be a difference between gold and silver. If western banks are trading below book, they deserve to be trading below book because in 2008 they shown how stupid they could be on the lending side. The regulators have also shown how stupid they could be when they went and gave subprime growth.
Effectively, the western financial system is operating in a scenario where when consumers defaulted, bankers came in and when bankers defaulted, the government came in and when governments are in the process of defaulting they require some extra terrestrial (ET) entity to come back. So far no one has arrived yet but they are waiting for ET before they can go into western banks.
Coming to Indian banks, what valuation should be the right valuation? It’s an art there is no science behind it. Let’s just look at past experience and say if this is the historical band most PSU banks will trade between 0.5 to 1.6. Private sector banks will trade between 2 to 4.5 times. Today, on an average, most of the PSU and private banks are trading at the lower end of their historical valuation.
Its unfair to distinguish banks between PSU and private, they should be actually distinguished between banks which are running well and banks which are not running well. Figure out which are the banks which are running well and if they are trading at their historical valuations its time to start accumulating. Over a period of time the cycle will change.
Our regulator the RBI is far superior to the western world. Our banks haven’t lent money into sub-prime and those kinds of things where 25% is the SLR 5% is CRR, so 30% is with the government and our government’s debt to GDP ratio is far lower than the western world. Put all those things together this is probably the time to accumulate banking stocks, not looking at the western world.
Q: Which are the sectors you think probably would lead the next bull run whenever it happens after a couple of years?
A: I hope the bull run will be not after a couple of years but a couple of quarters. We have seen that stocks which have led the last bull run did not participate in the next bull run. So right now, from a valuation point of view, defensives like FMCG and pharma are trading at probably at 30,000 level ofSensex whereas infrastructure, construction, engineering are probably trading at 10,000 level ofSensex, which is why the Sensex is at 16,000 and not somewhere in between.
Probably from a valuation point of view, infrastructure, engineering, construction appears to be one which should be leading the next rally. For that to happen, you require some government action on speedy clearance because right now nobody is interested in putting up projects. India is going to require power and there are some power projects which are coming up but not many new power projects are coming up.
Over a period of time, whatever projects which have come will benefit from higher electricity rates and that’s where their valuation will turn around. Right now don’t really look at sectors but look at companies, look at their valuations, look at their management and look at their business and then start building on that. From a sector point of view after going wrong for the last three years, I still think that infrastructure will probably lead the next bull run.