Indian markets are still expensive?
People keep asking me ‘Have the markets bottomed out?’
To me the answer is NO. I am not saying that you should wait for the bottom – I have my shopping list and have already bought some shares, but no we may not be at the bottom. Friday was a shopping day..and I did buy..
Am I not happy with the 7.5% growth rate? You got to be joking – it is one of the best in the world.
What is worrisome is the way the great MMS is ‘managing’ the economy. If India grew at 8% for 5-6 years, and US grew at 1% during this period, why is the Re-$ rate at 1=45? why not 1=35? Simple. Our internal fiscal discipline is ZILCH. Of course there is the macro explanation of wanting to keep the $ at that rate so that our exports do not look too expensive…be that as it may..
The US market has many shares available at 2.5% yield – remember their Gilt is giving you <2%. Very few good quality Indian shares are available at 2.5% yield – and we have SBI bonds available at 10%p.a.
Let us take the growth argument – Exxon, Chevron, Goldman Sachs, …will all grow at 17-18% + rate – I would be surprised to see Goldman Sachs growing at anything less than 25% for 2012. All these shares are available at a low p-e, double the gilt dividend yield, and with zero currency risk for an average American investor. You have to be very stupid to look outside of the US for investing – at least till the end of 2012.
Having said that, 2012 will be a tough year for the global economy. India might be able to weather it better than other countries, but the price earning ratios, dividend yield ratios, etc. are not mouthwatering. MBA colleges are still able to place all the people – even 2008 was more difficult. Salaries are still going up in double digit numbers, banks and life insurance companies are still opening branches.
Brokerage houses still have targets for account opening – but the number of active accounts may not be going up. The turnover at the exchanges are not going up – and frankly the FII should be able to find more lucrative markets abroad.
Let there be a few thousand job losses, let interest rates go down (somebody is still borrowing at 12% for industrial use, right?) and let builders repay 28%p.a. loans……then I would be willing to say ‘markets are at mouthwatering levels. Currently I am a nibbler, not an eater. And nibbler I always will be – at 9000, 18000, 21000 as well as 59000. After all I bought even when the index was 100, did I not?
Moral: do not wait for the waves to stop if you hope to take a dip in the ocean.
Sanjay
Very good article. Another way of explaining to not to time bottom but to just doing SIP. I really liked the way Subra Sir explained that indian market is not cheap and we should nibble/SIP often.
Also, a good point to notice is the difference that US equity yield is more that US debt yield. It is exactly opposite in India. And the difference in % yield in India is huge.
krish
In terms of absolute growth, India may be ahead of many developed nations but let us not forget that India is also the front runner in inflation. Frankly, if we account inflation the net growth of India could be negative and may be behind US and Europe.
We have not seen ‘Apple’ like company in India in last 5 years. In short time this company had generated the worth equivalent or more than all our equity in India. India needs an innovative company to drive the economy and the market. All the established companies growth is regular in the range of 20% muted in comparision to wage inflation. Obviously the market do not inspire the confidence either to FIIs or Locals.
Sanjay
India does need innovation…but at bottom of pyramid….kind of nano car.
Apple has brand name. When they launch a product, their profit margin is at 40% or more. Note that they do not have a moat around it. They don’t have benefit of scale. This can be argued for any innovation related company. (Apple do have a moat : iTunes)
Just imagine what Samsung is doing to Apple. It is copying Apple’s User interface ideas. With the cheap hardware it can produce, Samsung is beating Apple in its own game.
Apple’s products are very easy to copy. And they are not solving a big pain point (unlike pharmaceutical companies). They have to come up with new products else their success would be short lived.
If I had to bet my money, I would bet on Samsung.