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Time to bet on the market

Retail investors continue to stay away from stocks. However, the budget has given a new direction to the markets and put more money in investors' pockets by way of tax cuts.  

R. Sree Ram and Tanvi Verma         Print Edition: April, 2010

Of the roughly 188 million investors in India, only about 8 million put their money in equities and mutual funds. This number dipped further after the 2008 crash, and even though the markets have clawed back, the small investor has not. This is clear from the muted response to the recent IPOs and tardy inflows in equity funds. There are enough reasons for this— volatility, job losses, poor increments, overall economic uncertainty. Add to these the common investing mistakes by small investors: buying at the peak and selling at the trough. Most of the stocks that went down last year are trading at higher levels today, which means that those who had the nerve to hold on to their investments have made profits.

This may appear like a lost opportunity, but it is not the last one coming your way. Experts believe that over the next 5-10 years, equities will give annualised returns of around 15 per cent and outperform all other asset classes. Given the high inflation, this is perhaps the only avenue that can give you positive, real returns. In the previous bull cycle, between March 2003 and March 2008, the Sensex gave annualised returns of 35.4 per cent. This was backed by a 31 per cent average annual growth in corporate earnings. "Equities are poised to outperform most asset classes. It is, therefore, necessary to have exposure to equities to earn reasonable returns," says Gaurav Dua, head of research, Sharekhan.

So what should one do now? Wait and watch? Or is it time to take the plunge?

The slowdown is now in the past and the situation has changed drastically in the past few months. Macroindicators are looking up and corporate results have been good. Even at the individual level, incomes are expected to go up. Most salaried people are expecting decent increments this year. Consumers have been high on spending, given the pick-up in auto sales and retail credit. The only question that probably haunts you as an investor and, therefore, prevents you from entering the markets is whether companies (and, hence, stock prices) will continue to do well? Let's look at some factors from the market perspective.

Corporate revival has already begun: The FII inflows into the Indian equity markets are expected to remain healthy. There is ample liquidity globally because of the extremely low interest rates and expansionary monetary policy in most developed countries. India is expected to attract a fair share of such inflows due to the relatively buoyant economic growth and strong domestic consumption. This, in turn, is likely to boost corporate earnings, which will lead to the creation of shareholder wealth. "India is one of the few economies in the world that is doing well. This will help attract foreign investments and, hence, we might witness another cycle of investment-led growth momentum soon. Retail investors should see this as an opportunity to start investing," says C.J. George, managing director, Geojit BNP Paribas Financial Services.

The new economic order is in place: The markets seek a long-term direction from the macro numbers. The Budget was important for this reason. It reiterated the government's commitment to economic growth through a clear roadmap; it promised to reduce the fiscal deficit and put more money in the hands of small investors through tax cuts. "The budget focused on growth and that is the key," says Dipen Shah of Kotak Securities.

Experts say two themes will play out in the next 10 years. The first is based on domestic consumption, where people earn and spend more. The second is investment-driven, where investments in infrastructure such as roads, ports and transport systems, will lead to higher earnings for the companies. "The economic growth in India is durable and has a high certainty quotient given India's inherent structural advantages," says Sameer Kamdar, CEO, ASK Investment Managers. Companies will also benefit from the move to remove infrastructure bottlenecks. "Even if 50% of 1,000 km of new rail lines and 20 km of highways per day is achieved, it means significant progress," says Amar Ambani, vice-president, research, India Infoline.

Domestic consumption to sustain demand: India is expected to add the largest number of earners and an estimated Rs 29.28 lakh crore of financial savings over the next 10 years. As a younger population routes more money into equities and property, it will support the long-term valuations of equities. "India's growth is fundamentally domestic consumption-driven. The size of the opportunities would be an eye-opener," says Naresh Kothari, president, Edelweiss Capital.

Your strategy: All this indicates that the long-term picture for the economy and, therefore, the markets is good. Your investment horizon should also be long-term to benefit from this growth. Also, experts advise investors to make investments in a staggered manner. One question remains: how aggressively should you get into stocks again? Our regular columnist Dipen Sheth, who is vice-president, institutional equities, BRICS Securities advises a defensive stance.

If you are planning to invest, you will definitely need to know what stocks to buy. We asked six experts to list their best picks. The opportunity is here. Read on to grab it.

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