I have been wanting to write about the markets and the valuations for the last couple of weeks. Co-incidentally I got an email about 8 timeless quotes from Warren Buffett and I thought using two of them would help to share my view of the current market correction.
- “Be fearful when others are greedy, and be greedy when others are fearful.”
- “Price is what you pay, value is what you get.”
Budget 2015 - Now :
I would like to rewind a bit, before I share my thoughts on current levels. In May 2014, I wrote about the importance of three words, Margin of Safety as the markets were really euphoric post the BJP victory and the market was marching way ahead of the fundamentals. Same time last year, before the budget, my view, which was shared with many of my clients who had exposure to Indian equities and Mutual Funds was to exit India completely as the government had to present a transformational budget to sustain the huge valuations at Nifty 9000 levels. The budget happened to be a non-event for the markets, similar to the last few years and the market duly started its long overdue time and value wise correction, though it took few weeks post the budget.
In the last couple of years, on many occasions, market was celebrating every bad news with huge rallies, for the hopes of liquidity continuing. If we just go by the second quote of WB above, it was visible that the valuations were not sustainable, especially when the rally was driven by liquidity than fundamentals. It was just a question of when before markets correct itself to adjust to reality or pay the price for riding it higher with easy money. We even added Gold below 1150 levels exactly hoping for the current situation when the central banks couldn't control the markets once the tightening cycle begins.
The much required/expected correction started few weeks post the 2015 budget and reached 7800 levels from the high of 9100 in March and that's when I started to get interested again, which I shared here. The markets seemed to have factored in the Fed hike in November and were trading at higher levels by end of December. Suddenly storm hit the markets from day one of the new year and the ferocity of the fall took everyone by surprise. Being the results season and the AQR by the RBI which forced the banks (might require another blog on this) didn't help along with the sentiments in global markets which pushed the nifty to below 7000 levels.
Why Now and Why India :
As much as one believes in Efficient Market Hypothesis, market tends to prove everything wrong time and again. I don't think any single factor could be attributed to this massive sell off since the new year. May be, as Mr. Rajesh Nambiar, puts it, in his Nasscom 2016 welcome address, "The price of not knowing" is what I believe the reason for this panic. Not knowing the duration of access to cheaper funds or the potential future rate hikes along with the fall in commodities, led by Oil is what many believe are the reasons for this sharp fall. There is no single formula which works except buy when there is value and exit when there is irrational exuberance. As market often does, irrationality happens on both sides and I believe its currently on the downside.
The latest quarterly results were more or less in line with the expectations, till the PSU banks started to report their numbers following the revised RBI guidelines for bad loans. Ever since the 50 bps cut happened, RBI Governor has promised to look into the impediments which stops the banks from passing on the rate cuts and I believe the new norms for bad loans was part of that to get the system in sync with the policies. I hope and pray, the long overdue process for consolidation of PSU banks start along with this cleanup.
As per the two quotes of WB, there is huge fear on the street and even the compelling valuations haven't attracted much buying. Nifty has gone back to 2 years back levels, but look at the price of some the blue chips like HDFC and TCS, just to quote a few. The companies during this time have grown more than 30% compared to 2 years ago. If you had invested in March 2015, you would have waited two years for the earnings to catch up with the valuations. But, at these beaten down levels, where several stocks are trading at similar price levels compared to before but with increased earnings. You are getting an opportunity to accumulate blue chips at attractive valuations. Now, the crisis presents you an opportunity where companies like TCS, HDFC Bank will grow at the same rates, or even more, depending on the execution speed of Make in India and Digital India, but without having to wait for the valuations where you don't lose sleep over.
As referenced earlier in the Margin of Safety piece I wrote 2 years ago,
The markets might be back to 2014 levels, but the returns of the above mentioned stocks are still atrractive. The good news is there are many such attractive stocks available at current levels. This is a very healthy correction and I strongly believe it's that time to be greedy. For eg, IndusInd bank, which has been reporting close to 25-30% CAGR for the last 5 years is available at 23 times TTM. I also believe some of the rewards for UDAY and the restructuring on power sector will help turn around the sectors. Do you homework, stick to your circle of competence but don't miss the opportunity. Multibaggers in markets are made by investing at the peak fear and sit tight.
Following are some of the stocks I have added recently.
Disclaimer : The usual caveat applies. :) Please do your own research. I believe in value investing and I get excited when the downside risk of 10% is extremely compelling to invest. The situation in Feb 2015 was the reverse, with the max upside potential of 10%.
Good Luck and Happy Investing.
Why Now and Why India :
As much as one believes in Efficient Market Hypothesis, market tends to prove everything wrong time and again. I don't think any single factor could be attributed to this massive sell off since the new year. May be, as Mr. Rajesh Nambiar, puts it, in his Nasscom 2016 welcome address, "The price of not knowing" is what I believe the reason for this panic. Not knowing the duration of access to cheaper funds or the potential future rate hikes along with the fall in commodities, led by Oil is what many believe are the reasons for this sharp fall. There is no single formula which works except buy when there is value and exit when there is irrational exuberance. As market often does, irrationality happens on both sides and I believe its currently on the downside.
The latest quarterly results were more or less in line with the expectations, till the PSU banks started to report their numbers following the revised RBI guidelines for bad loans. Ever since the 50 bps cut happened, RBI Governor has promised to look into the impediments which stops the banks from passing on the rate cuts and I believe the new norms for bad loans was part of that to get the system in sync with the policies. I hope and pray, the long overdue process for consolidation of PSU banks start along with this cleanup.
As per the two quotes of WB, there is huge fear on the street and even the compelling valuations haven't attracted much buying. Nifty has gone back to 2 years back levels, but look at the price of some the blue chips like HDFC and TCS, just to quote a few. The companies during this time have grown more than 30% compared to 2 years ago. If you had invested in March 2015, you would have waited two years for the earnings to catch up with the valuations. But, at these beaten down levels, where several stocks are trading at similar price levels compared to before but with increased earnings. You are getting an opportunity to accumulate blue chips at attractive valuations. Now, the crisis presents you an opportunity where companies like TCS, HDFC Bank will grow at the same rates, or even more, depending on the execution speed of Make in India and Digital India, but without having to wait for the valuations where you don't lose sleep over.
As referenced earlier in the Margin of Safety piece I wrote 2 years ago,
Stock
|
Feb 2014
|
Feb 2016
|
Deepak Fertilizers
|
106
|
145
|
HDFC Bank
|
667
|
988
|
Vardhman Textiles
|
358
|
758
|
NTPC
|
119
|
125
|
The markets might be back to 2014 levels, but the returns of the above mentioned stocks are still atrractive. The good news is there are many such attractive stocks available at current levels. This is a very healthy correction and I strongly believe it's that time to be greedy. For eg, IndusInd bank, which has been reporting close to 25-30% CAGR for the last 5 years is available at 23 times TTM. I also believe some of the rewards for UDAY and the restructuring on power sector will help turn around the sectors. Do you homework, stick to your circle of competence but don't miss the opportunity. Multibaggers in markets are made by investing at the peak fear and sit tight.
Following are some of the stocks I have added recently.
|
Stock
|
CMP
( 22nd Feb 2016)
|
|
TCS
|
2315
|
|
HDFC Bank
|
988
|
|
Bharat Bijlee
|
750
|
|
Balkrishna Industries
|
560
|
|
Havells
|
281
|
|
Tata Power
|
59
|
|
LNT
|
1150
|
|
Praj Industries
|
80
|
|
KVB
|
415
|
|
ICICI Bank
|
198
|
|
City Union Bank
|
84
|
Disclaimer : The usual caveat applies. :) Please do your own research. I believe in value investing and I get excited when the downside risk of 10% is extremely compelling to invest. The situation in Feb 2015 was the reverse, with the max upside potential of 10%.
Good Luck and Happy Investing.
