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Sunday, August 21, 2011

Shall We Start Buying Equities Now?

The question which everybody is asking : Shall i buy equities now? And here comes the counter question: 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 two to 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.

Lets understand what happened in last 3-4 weeks time to well known mid cap stocks. Some of the well known mid cap stocks corrected so sharply that investors trying to do bottom fishing are worried now with their losses leaving others to avoid any fresh buying at current levels.

While markets have been correcting, the shock and awe for a lot of people happened during last week because of the way the mid-caps just collapsed. 

Mid Cap stocks are offering great value right now but the same stocks were looking dirt cheap last week as well. A lot of people bought Lanco Infratech 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 who so ever entered at that level lost 50% of their wealth in 10 to 15 days. As the old wisdom don’t try and bottom fish stocks which you don’t have assurance of quality in.

Considering above example, 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 move in coming weeks. 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?

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. Our 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.

If you are planning to invest in stocks with a time horizon of 2-3 years, its a great opportunity to enter into the stock market now by investing in fundamentally strong small and mid cap companies.  Nifty hovering around 4850 trades at PE valuation of 13.5. Historically, Nifty and Sensex traded at a PE range of 10 to 27. If we look at stock markets across the globe, most of the stock markets are trading at single digit PE, so is Indian stock market expensive at current levels? We do not think so, India deserve higher PE multiple because our economy is expected to do well in coming quarters delivering robust growth which we cant expect from other stock markets globally. 

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