It has been a volatile few months for the global markets, triggered by the Fed's decision to defer the much anticipated rate hike . In hindsight, the post market reaction would have made them feel like they missed a great opportunity. The cycle has started again and it is likely they wouldn't miss it in December. Since Sep, most markets have recovered to an extent and as I write this, Dow and Nasdaq are just 2.5% away from their record highs. India, in the meantime, has been volatile and the rate cut didn't really convince the market. I always believe in keeping it simple and am getting excited to start looking into Indian stocks for the first time since Feb 2013.
Background:
- Clients portfolio didn't have Indian exposure since the election as I preferred the safer approach of diversified Asia portfolio since I didn't want to run the risk of NDA failure.
- Valuations were never comfortable to enter India, post the election due to the Modi premium and the investment continued through Asia funds as most funds were overweight India.
- My view at the beginning of this year was that we needed a transformational budget to take Nifty beyond 9000. It looked unlikely then and so it turned out in the eventual budget. Mm
- I felt the upside for the rest of the year is capped considering the steep valuations post the budget. The view was to exit equity funds in India and move to tax-free FDs at 9% than a potential risk of 20%, We might miss out on the 5% upside gains if the correction wasn't coming but it's better than risking the 20% loss.
- India has been included as part of the Mutual Fund portfolio since last month because of attractive valuations.
Why Now ?
- The single fundamental metric of Buffett's I firmly believe is "Be fearful when others are greedy" and the fear is probably the highest now in the last couple of years.
- Margin of Safety - I touched on this briefly here as to why it's an important criteria during the last couple of years. Now, we are at a stage where, for instance, a stock like ICICI is available at PEG ratio of 1. I don't remember when was the last time it was valued so low. We have so many mid and large caps corrected at least 30%
- There are different views on reforms, but the consensus is that it may be too little. I would take any progress irrespective of the rate than none and also the markets have corrected from 9100 levels to 7800 levels since March.
- RBI has done its part by cutting 50 basis points in Oct and even the earlier rate cuts weren't passed on to the economy yet. RBI Governor said this after the rate cut "While the Reserve Bank’s stance will continue to be accommodative, the focus of monetary action for the near term will shift to working with the government to ensure that impediments to banks passing on the bulk of the cumulative 125 basis points cut in the policy rate are removed". I believe it's just a question of time before the banks pass on most of the 125 basis points
- Considering the above, I feel the risk reward is in our favour at current levels. I always get excited if the stocks/index levels are extremely compelling at 5% lower than current levels and I think we are in that Zone now.
Some of the stocks added during the recent correction
- Indus Ind Bank
- HDFC
- HDFC Bank
- Exide Industries
- TCS
- ICICI Bank
- Havells
- Lupin
- Wockhardt
- AIA Engineering
- SBI
- Canara Bank
Some of the above were added because of the valuations and some are convictions based on the possible turn around.
One of my respected client said India is that "Value Trap", always seem attractive. I hope, by budget 2016, we feel it was more the phase of Bargain Hunting than value trap.
As a value investor, I must reiterate that these are attractive levels to enter. Having said that, December FOMC is a big risk for Emerging markets and a rate hike (likely) can see some immediate panic moves in Indian markets. The more prudent strategy would be to phase out entry over the next two months. It may not be a bad idea to wait out the FOMC completely before entering either. But the larger point is: from a valuation perspective, these stocks are attractive at the moment for a medium to long term investment. In case of further correction, post December FOMC, keep adequate buffer and be ready to add substantially more to the portfolio.
These views are entirely personal and please do your own research before investing.
Good luck and happy investing.
