Where are we in the markets?

Is it a good time to buy or will things get worse before it gets better?

I am not in a position to answer both these questions without going into where are we today.

Let’s see what is going well for the Indian economy: Without doubt it is the government spending which is happening  in infra – so roads and rails are being built. Not sure whether the air infra is being beefed up in a big way, but Delhi and Mumbai airports are already over crowded. I shudder to think what will happen if Indigo grows at 24% yoy for 5 years instead of 3 years. Infra spending means more cement, steel, etc.

On the other hand private investing is not going anywhere. Having banksters who do not understand business is not helping either. Small steel mills are struggling – the banks do not want to hear some words. Steel is one of them. There is no point in wondering what will happen to them. I doubt whether JSW or Tata Steel can get a Rs. 50,000 crore loan sanctioned in today’s scenario. We need better bankers for sure.

Internationally nothing much is happening for sure and that is hurting India also. Our exports are not really going to fly, but our domestic demand is intact. Pharma and IT are struggling in the new technology space – and they will surely create lesser jobs. They might even be shrinking and OBVIOUSLY not replacing the retiring numbers. All this is not very good in the short run.

Our markets are surely ahead of the earnings and they have been searching for earnings for a long time. Growth is just not visible in the EPS. This means we are in 2005 in terms of an analogy and surely not in 2003. We have seen no earnings growth (or very low in the biggies) in the last 3-4 years, but the markets have gone up. A portion of the PE expansion can be explained by the fast fall in interest rates forcing people to invest in equity funds. The huge marketing effort of the mutual fund industry, the life insurance industry and the banks themselves is also contributing. One part of the PE expansion story is basically because markets anticipate a recovery  ahead of the actual recovery. However till the earnings come, markets will be susceptible to some stray winds.

Govt spending is happening, private consumption is growing, but the things to be concerned are private investments are not happening, exports is sluggish (but up from the bottom), 2 of our big industries are struggling – IT and Pharma sales are down, and margins are under pressure. Our banks are wondering what to do while realising that they are simply incompetent to do big ticket lending. FDI and FII are both subdued. One big announcement and the market will lap it up. 

One more thing to acknowledge is the retail money sloshing around. All IPO immaterial of quality are being lapped up. D’Mart with a market cap greater than Walmart is a case in point. BFSI valuation is in the stratosphere – banks, Nbfc, life insurance,…are all booming. Many companies are lining up for the action too – Sbi life, Icici Lombard, Reliance Mutual fund, …are all in the pipeline. Also the increasing SIP amounts, the auto top up, expanson of demat accounts -all are indicators of liquidity. However, the banking sector is wondering where and to whom to lend. Funny times.

Action plan: 

Peter Lynch says if you spent 10 minutes on the Macros, you have wasted 7 minutes. I agree. I wasted more than 10 minutes writing this. If you spent 10, you have wasted enough.

You will have to take a 5-7 -9 year SIP view on the market and is not an easy market like 2002/3 was. We should book profits ONLY when we see 2-3-4 years of good earning growth AND PE expansion. That is the time when valuations can be said to have been fully achieved. Right now we have seen PE expansion, and waiting for the EPS to grow. Makes more sense to be investing now – from an investment perspective. Whether the correction is a small 2-3 percent or a deeper almost 10 percent, is anybody’s guess. Of course I am assuming you have a 7+ year view and will invest through a SIP in a multi cap fund and use the growth option.