Personalfn approached three of India's leading experts on the stock markets to get their views on Monday's market crash and their expectations going forward. Objective: To help you block out the 'noise' about the coming doom and to focus on fundamentals.
The experts we called in:
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Rajat Jain, CIO, Principal Mutual Fund
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Srividhya Rajesh, Fund Manager, Sundaram Mutual Fund
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Ajit Dayal, Director, Quantum Advisors
PFN: Is the fall in the markets justified? Is the continuity of reforms a concern?
Srividhya: The fall in the market has been due to negative surprise on election verdict. Divestments have been ruled out. Reforms may be expected in the agriculture sector. But until the common minimum programme draft is out, we will not get a clear picture.
Rajat: I think that the scale and the nature of fall in the markets are irrational. It is however not only a factor of the election results in India, but is also part of the weak performance of both debt and equity markets in emerging markets worldwide in the recent past. There are a number of very well managed companies which have good earnings visibility and are available for 6-8 times forward earnings today. That is why I say the markets are not being rational today. Investors who buy stocks or mutual funds now may face volatility in the short run, but will be rewarded more than adequately for taking exposure to equity now.
The Congress is yet to lay out its agenda for governance, but often we have seen that real policies are different from public posturing. Incidentally, the Congress manifesto says that the party will broaden and deepen economic reforms. I think that reforms will continue though the nature and the pace may be different.
Ajit: One thing clearly is that stock markets move on perception and react to facts. Markets are concerned that what they expected has not really happened.
Do I think the reforms will continue? Well, it depends on what you mean by reforms. I think, the fact that the government is opening up, allowing private capital to do a lot more things and allowing people to do a lot more things with their money, that is all reform. In terms of delivery, if you look at what the NDA has delivered over the last 5 years, there has been a net loss of 0.6 m jobs in the organised sector i.e., government companies plus private companies.
India was shining to some extent for urban India, but I think that for a lot of people India was not shining and the government was caught up in its own 'urban-centric' euphoria and believed that everything was hunky dory. I do not believe that the continuity of reforms is a concern, but I clearly believe that whatever the reform path that was taken in over the last few years was good for urban India but not good enough for rural India.
PFN: Do you see the correction in the markets continuing in the near future? At what level would you expect the markets to bottom out?
Srividhya: Markets may be range bound until the government is formed. But at current levels markets look attractive.
Rajat: It is difficult to comment on the behaviour of market participants each of whom thinks differently and whose actions translate into market movements. I think the risk reward equation is clearly in favour of being invested in equity now and hence the markets should not go down much from here. In the short term the market may look at the budget as document of economic policy before moving up. They might consolidate till then.
Ajit: We have already witnessed across the board selling. The markets will fall to whatever levels, till the foreigners clear out. Keep in mind, that the story in 2003 was a weaker dollar, lower interest rates. Borrow in US dollars and invest anywhere in the world and make money! There is a reversal in that now. Interest rates are expected to rise, and have already started firming up quite rapidly, and because of that the cost of carry, i.e. the finance charge for a speculative investor, has gone up. The risk that the dollar is going to rise makes it more risky for him to invest in a non-dollar economy. So, money is going to be sucked back into the US. And as money gets sucked back into cash assets in US dollars, there will have to be an all around selling in the emerging markets that have done better than the global equity as a whole in all of 2003. You do have this issue of getting back to the home country, which is the US.
So, a decent part of a decline in markets can also be attributed to the fact that global money is going back, which will get accelerated by the fact that the foreign buyer was the sole buyer in India in all these months.
We do not anticipate it falling below 4,500. For our clients, we are already recommending that we start buying even though it is not yet at 4,500. So, as the stocks become more attractive, we being long-term investors, do not worry about the stock prices falling by a few percentage points in a day or a week.
PFN: An overlooked fact by retail investors is that global markets too have corrected sharply. How much of the fall in the markets, if at all, can be attributed to this global correction?
Srividhya: If election related uncertainty was not there, only specific sectors may have been affected but because of the current political situation, entire market has fallen.
Rajat: As I said earlier, the global factors like the instability in the middle east, the weak performance of the emerging markets, the possible impact of the higher oil prices on the world economy also clearly have an impact here, though the Indian markets are not as strongly correlated to the world markets as some of the other markets are.
Ajit: The dollar flowing back to the US is a story that really begun in February or March 2004 and is accelerating every day. And if you add to that the uncertainty or the shock results post the elections, it is clearly the foreigner who is selling. The statistics are showing that. And when the foreigner sells, it gets magnified on the downside because the punter is selling ahead of the foreigner.
But please keep in mind, the Sensex has fallen from a peak of 6,000 plus, but it is pretty much where it was 7-8 months ago. Which may be people should question, was the rise from 5,000 to 6,000 justified on fundamentals? We believe, no.
PFN: Please share with us your long term outlook for the markets?
Srividhya: If a stable government is in place, we expect the market to move to previous highs in the medium term and beyond in the long term.
Rajat: Positive. If you choose your stocks with care, or come through a mutual fund, chances are equity will give returns better than any other asset class.
Ajit: The long-term view is that there are companies in India with very good managements, very good businesses, and we are very much stock pickers. So we are optimistic on that. We also believe that long-term money flow into equities as an asset class will increase. We do not believe that equities as an asset class will ever be dead. Equities are probably the preferred asset class for most investors over the long haul. So we are optimistic on money flows of market. It is not for us to make a comment on day-to-day moves in the market.
PFN: What would your advice be to retail investors?
Srividhya: Selling in panic may not be appropriate at current valuations. Investors may move out of sectors where major triggers are dependent on government policies or reforms.
Rajat: Don't focus too much on the near term movement of stocks, get the right asset allocation and stick with it. Focusing too much on short term movements will probably lead to investors making sub optimal moves with their portfolio which will hurt their performance.
Ajit: It depends on what kind of retail investor you are talking about. If the retail investor was a punter (speculator), I have no advise for him. Because you know, he has to bear the risk of punting, taking short-term bets on the market.
But for retail investors already trying to build a long term portfolio, I would say that either do research on equities themselves or else go out and seek professional advise on what to do with their portfolios. If you are a long-term guy, you should not panic. Long-term investors never panic.
The buying opportunity has begun.
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