Even to the diehard optimists among us, it’s clear now that the world of investing is in deep (and serious) trouble. And the contagion is global, involving all the dependable blokes who have bailed out investors (and sometimes entire economies) during the past crises. I spent the last week meeting a number of respectable fund managers and investors, and surprisingly, came back educated. The five major learnings are as follows:
1. The trouble isn't going away anytime soon
The decoupling of BRICS from the economic pillars of the world (the US, Eurozone, Japan, etc) is not happening. In fact, emerging economies are a little ‘too coupled’ with those ‘First World dinosaurs’, and no amount of denial is going to help. The turmoil in the US markets will continue to cast a shadow over the Indian economy. So, whether you are Mayawati’s fan or Manmohan’s, settle for the grim reality that unless US presidentelect Barack Obama gets it right in his country, there’s little hope for India, and therefore, for the Nifty. You can kiss those theories of domestic consumption and savings goodbye. It’s not because they are not important, but because they were always there and we still needed foreign investment to move our capital market, and overseas customers to help some of our best-run businesses to grow.
2. Value won’t help if there’s distress selling
This is a recurring nightmare in the history of stock markets; when redemption or liquidation pressures threaten a fund manager, he or she is not going to sit and evaluate a stock. A sell order by the fund manager (across the portfolio holdings) will inevitably send out panic signals to the broker’s dealing desk, especially at times like these. So I might like the franchise that, say, Titan commands with its customers, but if a big shareholder is selling to fulfil other market obligations, my luck runs out. Some of the possible victims of this distressed selling are Reliance Capital, Aban Offshore, Reliance Infrastructure and Praj Industries. So while these may be good stocks at current levels, deleveraging can hammer them down further.
3. We may be close to capitulation
A number of market participants feel that at least one final (and painful) purging is just around the corner. Will things look up dramatically after this? Perhaps not, because the fundamental drivers for equity sentiment (an economic recovery, financial liquidity, a globally relevant theme for investing) will take some time to emerge considering the real economic damage that has already been done. In fact, the world will remain vulnerable to more damage as the fires of economic recession singe businesses and countries as well. One of the more respected people I met said that a ‘systemic collapse’ in business was possible in India, even if it was highly improbable. The key question is: Does it make sense to remain highly liquid and grab things on a couple of ‘bad days’?
These large-caps have been beaten down badly
|Stock ||1 Jan ‘08 ||20 Nov ‘08 ||P/E ratio|
|Figures are stock prices in Rs|
4. Large-cap bias will remain in investing
It’s a no-brainer that large-caps will lead the recovery, whenever it happens. Mid-caps are dead meat. However, the focus might be stockspecific or industry-specific. Like all the bull runs preceding it, the next bull run will also be built on stories from a clutch of sectors that are on an advantageous ground. The companies that exhibit managerial vision, execution strength and financial innovation will lead the recovery. Consider some randomly picked large-cap companies that have been beaten down (with well-placed macro-concerns, I concede), but show significant promise that they will continue to be valuable for their customers, and therefore, their stakeholders. If the world is to get back to its prosperous ways, and if India is to follow the trend, wouldn’t it be many of these stalwarts who lead the pack?
|WHERE’S THE VALUE?|
Value metrics and stocks that score
|Brand value||Glaxo SmithKline Consumer, Colgate|
|Customer franchise||Cummins, HDFC|
|Profitability||Castrol, Asian Paints, Esab|
|Cash rich||Infosys, Hind Zinc|
5. The old rules of investing are back in focus
Customer franchise, brand value, pricing power, basic profitability (RoI, RoE, etc), cash richness, lowto-zero debt and strong core competence will re-emerge as the distinguishing factors while picking winners when the economy recovers. But perhaps nothing in the list of old rules has endured the test of time as well as the canon on greed and fear. While there is surely some fearful news waiting to play out, it’s time to get more and more greedy with every fall in the Sensex. The problem right now is that the falls are almost daily occurrences!
— Dipen Sheth, Head of Research, Wealth Management Advisory Services. He can be reached at email@example.com
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