After a sluggish growth since February 2018, Sensex and NSE have patched-up again with their all high-time highs. In spite of this appreciation in the benchmark indices, weakness can be observed in the broader markets as many mid-cap and small-stocks underwent free fall irrespective of the robust earnings growth. Clearly, many investors are either resorting to large-cap stocks or following a ‘wait-and-watch’ methodology or have entered the panic state.
Investment quote by Warren, “Be fearful when others are greedy and greedy only when others are fearful.”
On account of many uncertainties and market headwinds, fear and panic have gripped many investors.
Reasons Behind The Fear of Today
Global trade war fear: The erratic commentary by Donald Trump and counter-reactions by China is expected to continue for some more time. As long as the domestic consumption story continues, India is expected to be less impeded by the transient impact of global trade war fear.
US yields and its impact on EM flows: Hike by Federal Reserve and its impact on emerging market inflows is again no longer a sealed secret. However, the recent trend of financialization of savings has made our markets more Domestic Institutional Investor (DII) driven than Foreign Institutional Investor (FII) driven.
Reclassification of mutual funds: Not just small-cap and mid-cap stocks, even many large-cap stocks have faced the heat of SEBI’s recent guidelines on mutual funds. However, going by the history, markets will quickly absorb this shock leaving this episode as another temporary hiccup in the books of Indian stock market.
Erosion of trust: Scams-infected and auditors resignation from companies such as Manpasand Beverage, Vakrangee, PC Jewelers; investors are losing trust in small-cap stocks.
Reasons To Invest – The Greed For Tomorrow
Investments waiting in the pipeline: Our interaction with a lot of investors suggests that there is ample institutional capital waiting on the sidelines to get invested. In fact, large investments could be seen in select stocks which are driven by value.
Low quality vs. high valuation: In this stage, high-quality franchises continue to attract flows irrespective of their high valuations. On the other hand, any stock that has delivered below expectations has been punished harshly by the markets. For example: Bajaj Finserv on positive, whereas Motilal Oswal & Force Motors on negative.
GST collection: I strongly think that investors will now be focussed on GST collection month-on-month - a data point for us also to keenly watch.
Corporate earnings growth: CNX Nifty 500 excluding PSU banks has witnessed more companies where results exceeded their estimations rather than falling short. This is very encouraging despite GST disruption, weak exports and weak investment cycle.
Play out of revolutionary reforms: The reforms set by Government such as GST, JAM, Bankruptcy law etc. will have its positive ramifications for the Indian economy irrespective of the party in power.
Indian Markets - Way Ahead
In the end, markets trade on fundamental strength of core earnings and not entirely polity.
If the general sentiment improves, as stated in points above, markets can roll over to an average of FY19-20 EPS of approximately Rs. 2050 and discounting it at 20-22.5xs implying Sensex range of 41000-46000, an upside of 12%-26% over the current levels.
Even in the most pessimistic of scenarios, markets will trade at ~18xs average of FY19-20 EPS by Oct-Nov 2018 implying Sensex levels of 36000-37000. Given that Indian economy is on track of recovery and amongst world's largest fastest growing economy's, downside from current levels on a fundamental call looks limited as long as market sentiments don’t deteriorate.
In short, you don’t have anything to lose if invested now. However, if the opportunity is missed, you will miss out on significant gains in the future.
We can’t do anything about the short-term volatility as they are influenced by various macro and micro fundamentals. However, it is important to understand that this volatility only temporarily hampers the ‘stock price’ of a company and not the ‘future value’ of the company. Volatility in the markets is absolutely normal and there is nothing to worry about it. In fact, it gives you an opportunity to buy quality businesses at bargain rates.
When identifying stocks, it is advised to stay invested in companies driven by value along with strong signs of visibility in the corporate earnings and stringent corporate governance policies.
We would like to conclude with: Now is the time to be greedy and invest in sound companies for a long term investment. Clearly, the opportunity to create wealth is Now Or Never!