No silver lining yet
Dipen Sheth December 11, 2008
By all counts, it looks like equities will not be a winning trade in 2009. This sounds like an investing blasphemy from a stock market addict—and a practicing portfolio manager at that. After all, is it not true that equities are the ‘ultimate’ asset class and that they should outperform all other assets over time? If so, why should you avoid (or reduce) equity exposure in the next year? Here are some reasons:
NTPC, India’s third largest business by market cap, is a power utility whose ‘mandated return business’ is overvalued at more than two times the book value, now that the bar for higher power generation (to earn higher than mandated return) has been raised. This, at a time when coal linkages threaten to disrupt generation at some of its most stable plants.
Switch to Bharti Airtel, still reporting net customer additions that dazzle its followers month after month. But ask yourself whether it’s only time before this last man standing also cracks. Hero Honda’s October 2008 sales figures (up by 0.5% YoY) also stood out among the ruins just as we went to the Press. For the record, Maruti’s YoY volumes were down 27%, Mahindra’s fell by 40% and Bajaj two-wheelers posted a 37% drop. The Indian consumer is surely tuning in to the bad news from across the world. Now what do you think are the ‘coupled’ India’s chances of escaping the global contagion?
Thirdly, no matter which company or business you like, remember that stocks move up only when money chases them. Where are the investors who can provide this buying momentum? Hedge funds are stuck in thorny hedges, many of the ‘long-term’-oriented players among the FIIs are winding up their sub-accounts, and foreign banks with managed fund exposures are pulling out money from India in the face of the domestic crisis and redemption pressures. The net sales by FIIs have crossed Rs 1,00,000 lakh crore in 2008 (over $20 billion at Rs 50 a dollar). This figure will rise when you consider that many of those dollars were pulled out when the value of dollar was lower than today. Yes, Indian institutions have pumped in Rs 70,000 crore, but that’s surely not enough. Consider what will happen if the pullout sustains for the over $60 billion that the FIIs still have invested in India?Fourthly, I’m getting sick of all these theories of domestic consumption and the investment-backed-bydemography argument. The demographic dividend will soon turn into a demographic curse if the job creation unleashed by telecom, software, banking and BPOs slows down. There is no denying the excellent products, super management capability and enduring brands of HUL, ITC and Nestle. But look at the PEs they are trading at. What do you feel like doing when ITC is at over 20 times, HUL kisses 26 times and Nestle wants to pole-vault over 30 times its earnings? Especially when you see how L&T is battered to 10 times, SBI to around book value and Tata Steel is at under its asset replacement value. And there seems no hope for these stalwarts in 2009.
So, at the cusp of 2009, I have told you all that I want to, as you bravely chart your way through the new year. I have no intention of being a party pooper. I still believe that wealth is best created through rational investing in the equity of great businesses when they are undervalued. But blindly advocating exposure to equities, with no reference to the underlying economic fundamentals or appreciation of the ground realities that affect valuation and sentiment, is not rational.
— Dipen Sheth, Head of Research, Wealth Management Advisory Services