India - BUY Or SELL?

A lot has been said about the Indian markets in the past - liquidity driving the markets, strong FII inflows, booming economy and so on. Well - As many pause to ask the question - BUY OR SELL, its important to take a fundamental view. Analysts sound like nuts! When the markets were booming this January ’08, everyone screamed “BUY BUY BUY” and that too in a sector which was supposedly going to collapse in the next few months (banking)! A safe way to avoid criticisms like these is to say “Buy for long term”!! Added to this, their own stigma of recommending stocks which are either on their portfolio or clients portfolio is well known. There are instances of many brokerage houses selling after issuing a buy recommendation. Will someone provide an ethical and logical recommendation? Here, I try to answer questions through logic, reasoning and data. Some parts of the article are directly taken from my earlier article dated 4 months ago – it still holds!

A couple of things from the past - FIIs were net buyers in equity for most of 2001 except September when the world markets tumbled. MF's however were net sellers for the year. So, the fundamental logic on FII money driving the markets is not completely true. Secondly, FII investment since 1999 stands at an astronomical sum - you would need some time to count the number of zeros!! If at any time, they were to emerge as net sellers, markets would tumble like bunch of cards!! Markets are bound to move up and down due to various macro-economic factors. Fundamentally, if you look at the PE range of markets, we ranged somewhere between 14-20 from 2003-2007. Currently, markets are valued at 17 times PE. This means, there is room for another 20 percent downside just by looking at the low PE range of the market.PE itself is a tricky term. While, Infosys may be valued at 19 times PE, Tata steel is valued at 8 times FY08 PE. And, both are strong brands with strong growth rates. So, it’s not fair to judge a market based on PE. Is 14 times PE expensive? Yes, if you compare with other emerging markets like Thailand. PE is a mix of various factors - economic indicators, Brand image, growth rates, political stability etc. So, if the outlook for India remains strong at 7-8% growth YOY irrespective of global economic indicators, its quite possible that the current PE level would be sustained. IT companies would however face some pressure due to rupee depreciation and a possible US slowdown in terms of IT spending. Many may argue that fundamentals are still strong for exporters. As far as one can read, the demand situation has incredibly slowed down. Fresh business accruals are hard to come by and existing ones are on the path of survival. To say that the existing business would sustain and contribute to growth isn’t logic! Sustained economic development coupled with new business demand alone can propel growth.

Further, an increase in interest rates to control inflation is a temporary phase. During this phase, Indian markets may not see great growth rates. To sum, my sense is that Indian markets are fairly valued at the moment with adequate room to fall. Investors need be patient not just to hold their investments, but also wait for the right time to invest. You might not always pick the bottom, but ensure that you have some cash to invest when everyone else is selling across the board. Based on historical analysis, my sense is that the markets still have some room to fall.