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October 26,2008
Don't miss the bus, invest now
The drop in markets is temporary as valuations are very attractive and markets will revert back to mean valuations. As India's growth reappears on the horizon and the global situation stabilises, FIIs will buy again.

Last chance? Really? This was the reaction of people over the last weekend since the Sensex slipped under the 10,000-mark. Investors are pressing the panic button and getting ready to bail out. There is talk of a further fall being splashed over all the television channels. Even analysts are painting a gloomy picture and advising investors to wait on the sidelines. In fact, a fund manager of one of the largest domestic mutual funds was advising a cautious approach. So, is it really the last chance to buy? Are the experts on TV wrong?
 
Target audience
 
The target audience for TV channels (and the advertisers) is the active traders lot which contributes to the Rs 60,000 crores volume on the stock exchanges everyday. The entire effort is focused on finding out where the markets are likely to go the next day. This dilutes their focus from the underlying fundamentals and what all the experts and TV channels are trying to do is pick the bottom. Everyone is trying to time the market. Not a bad idea. Except that one is yet to meet anyone who has done that.
 
The experts said recently that timing the market was a futile exercise. We were told stories of Warren Buffett and long-term investing, and that equity is the best vehicle and option for the long-term. What has changed so drastically that the long-term prospects are spoiled? And there is no mention of Buffett nowadays.
 
Wrong picture
 
The long-term prospects were never as good as the analysts were painting it out to be at the 20,000 levels. But now things are not as bad as many are projecting it to be. The problem with most analysts and a large section of the media is the tendency to take the recent trend and project it into the future. We saw this effect in January.
 

"Markets rallied from 15,000 to 21,000. India is doing well. We will rally till 25,000." We also saw this effect in the mid-year with oil. "It rallied from $70 to $140. There is no oil available and it will touch $200 soon."
 
Reverse logic
 
The same logic is in reverse today. "Markets have crashed. India is facing difficult times. So, we will continue to slide further." But, is India set for a rough ride? There will be many corporates who will reel under the liquidity crunch being faced now. The days of really easy credit are over and many corporates, who had embarked on excessive and aggressive expansions and acquisitions, will be squeezed by the credit crunch.
 
Political considerations (like the fear of inflation in an election year) have put economic growth priorities on the backburner. India Inc is paying the price for this and the current pessimism about the negative impact is justified.
 
But this analysis misses a key point. Most of India~s troubles are domestic in nature, caused largely by the Reserve Bank of India~s (RBI) tightening cycle. This gives us the ability to resolve our issues domestically when the RBI reverses the tightening cycle. With the recent cash reserve ratio (CRR) cuts and the expected rate cuts in the credit policy, the RBI has already begun the loosening cycle.
 
Inflation eases
 
Inflation has dropped below 12 per cent and should drop below 10 per cent in the next two months. Commodity prices have dropped sharply across the world providing relief from the inflation threat. The long-term rates are already indicated lower by the debt market in India. The government securities are quoting at a 10-year yield of 7.68 per cent, as against a peak of 9.4 per cent just three months ago - a drop of more than 170 bps.
 
Thus, India~s growth should be back on track over the next six months. The sharp fall in oil and commodity prices will reduce the current account deficit being run up. The fiscal deficit will also be sharply lower than feared as the oil and fertiliser subsidies will come in closer to the budgeted numbers.
 
Sensex~s valuation
 
Against this backdrop, the recent fall has made the Sensex cheap by historical valuations and is trading at under times forward earnings. Even factoring in a moderate drop in expected earnings due to a slowdown, the Sensex will still be available at 10.5 times.
 
The drop in markets is temporary as valuations are very attractive and markets will revert back to mean valuations. As India~s growth reappears on the horizon and the global situation stabilises, FIIs will buy again.
 
Rallies will be weak and markets could keep falling. But it is unlikely there will be serious damage from these levels. Investors looking to build long-term portfolios should heed Warren Buffet~s advice - be fearful when others are greedy (think of Sensex at 21,000 level) and be greedy when others are fearful (how about right now?)

 

http://economictimes.indiatimes.com/Features/Financial_Times/Dont_miss_the_
bus_invest_now/articleshow/msid-3641880,curpg-1.cms
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