Beyond 5000: Look Before You Leap

Updated: Nov 9 2003, 05:30am hrs
Small investors have been watching with anxiety the ascent of the Sensex that defied gravity to zoom past the magical figure of 5000 and then slide below it on Friday to close the week at 4,971.57 points. The Sensex has rallied over 66 per cent during the current fiscal. The anxiety of small investors stems from the fact that as the Sensex zooms and a set of investors mint money, they are left watching the party. Should they gatecrash the party now Or should they wait for a correction to set in

The partying set of investors are those who already have an exposure in the stock market either through fresh purchases made in the last one year or so, or those who have been holding on to stocks for a longer period of time.

EXPERTSPEAK

GN Bajpai, Chairman, Sebi: In the current market, investors who have the capacity to understand the information can go ahead and take a decision. The others can use the service of fund managers. Do not get carried away by the market movement.

C Jayaram, executive editor, Kotak Securities: Though at this levels the market is not undervalued, with all the alternatives available, equities still look better.

Among the alternatives available, the fixed income may provide a return of about 6-7 per cent in the next one-year or so. However, from the current market levels, the expectations from equities still look higher.

Taking a cautious approach, a retail investor who doesn’t want to go for full equity can go for schemes which are dedicated towards debt papers but having a small portion in equity so as to have better yield.

Milind Barve, managing director, HDFC Mutual Fund: To begin with, retail investors, should not put in their bread and butter money into equities all at once. The retail investor should not be wary of the risk factor and allocate according to his risk profile.

I am a believer in the fact that the levels of the indices are unimportant. It is not very wise to time the markets and try and look for opportunities to book profit only. One should allocate in equities over a period of time. Once they invest, they should not churn their portfolios too often. For those investors who had strong debt bias all these days should realise that the days of sky-high returns in the range of 12 to 14 per cent from debt instruments are long gone.

Shailendra Bhandari, CEO, Prudential ICICI Asset Management Company: The bullrun is different this time. A close look at the P/E factor would show that currently the market P/E hovers around 14 as compared to 22 in the last bullrun in 2000. This is proof enough of the fact that there is still a lot of opportunities left in the market even at these levels.

The second type of investors are those who have been tracking the market as fence sitters and waiting for an opportune time for entry even as they are reluctant to park money at higher levels. But the problem is: they do not want to miss the bus at any cost.

However, even the type one is confused whether to book profit at the current levels or wait for some time to pocket some more profits. However, for the fresh entrants, the question is whether it is worthwhile taking a risk in an over-heated market While the investors have questions galore as they want to make the most of this rally, for market experts who watch the developments closely, the sheer pace and depth in the markets at these levels is astounding to say the least. Also the market is relatively cheaper in terms of the P/E factor. Couple this up with low interest rates and you have a perfect pair. A question that arises is: How different is the current rally from yesteryears

FIIs have invested more than Rs 27,000 crore or $5.26 billion till date in 2003 as compared to the previous record high of over Rs 13,000 crore, the highest ever in the last 10 years.

Also P/E at the current levels is the lowest as compared to previous rallies. Strong corporate earning numbers by frontline companies have been aided by rock bottom interest rates. Moreover, unlike the earlier bull runs, the rally is not confined to a particular sector.

Marketmen, however, are unanimous in their opinion that this is just the beginning of good times as this is a bull run based on fundamentals. Though deep-rooted corrections are not being ruled out, a great bull run certainly is no impossibility. But is the retail investor convinced Not quite... Consider this, compared to approximately Rs 13,00,000 crore in bank deposits in the country, only Rs 11,000 crore is in equities as an asset class.

Yet experts are convinced that going ahead, equity returns are poised to beat returns from all other asset classes like debt, real estate, gold or what have you.

As per economists worldwide, India is a vast entity both geographically and in terms of population. A country described by Mark Twain as the cradle of humanity is now host to over a billion people, the second most populous country in the world behind China. Economists are also of the opinion that in comparison to China that seems to be most attractive in terms of FDI inflow, economic reform in India and significant growth in skilled labour has led to the development of a knowledge-based private sector.

This has been particularly evident in information technology services, business process outsourcing and pharmaceuticals, that now provide research and are a development hub for many western corporations. Add to this strong demographics and increasing access to credit for both companies and consumers and you have a powerful cocktail for economic performance.

According to National Association For Software Companies (Nasscom), outsourcing in India can result in cost savings of between 30 per cent and 50 per cent.

The drop of over 80 per cent (from peak) has enabled companies to take this option and make India their global R&D hub. The future in this area is indeed promising.

Take a look at some examples. General Electric first invested in India in 1997 and currently employs 11,000 people saving over $270 million per year. It plans to increase the number of employees to 20,000 by the end of the current fiscal year, generating a further $130 million of savings.

Then again, it was not the first company to have this option and will not be the last, companies as diverse as HSBC and Texas Instruments are looking to increase headcount in India over the next few years.

As to how far this growth can go, Morgan Stanley estimates that India could garner 5.7 per cent of the IT services and business process outsourcing market (such as call centres) by 2010 and this market could be worth $1.1 trillion. This overshadows the 1.5 per cent share of $ 565 billion achieved in 2001.

If their forecasts prove correct, revenues from the IT industry alone will go from $12 billion in 2002 to $62 billion by 2010. While this in itself is good for GDP growth, multiplier effects are also significant and imply improvements to personal income and consumption, say economists.

According to Steven Bell, global economist, Deutsche Asset Management: India stands in a unique position, competitive with western markets on costs and competitive with emerging markets in expertise. With sensible macro-economic policy, this armoury of competitive advantages leaves India well-placed to exploit opportunities before it.

From the aspect of a foreign investor, he adds: India remains the favoured market in our view for those willing to broaden their investment horizons. India will provide strong long-term returns, he further adds with conviction.

So what are the key points a investor should keep in mind at the current level or whenever he invests in the stock market

The current opportunity is not the last opportunity. The future will also offer a plenty of opportunities also. Most investors in a bull run dont want to miss the rally and under such circumstances redeem their debt investments or bank deposits and park their money in equity schemes or any thing which is deemed good. Studies show that a big amount of money is lost in equity markets in a bull market.

If you miss a bull run, the maximum damage is you dont make any money but remember, investments made without precaution will erode your capital.

In a bull market, tips come from all corners. Gather information, but dont implement unless you know about the company higher the market goes, more are the tips floating around. A lot of investors think that the only way to make money in a bull market is through tips.

Do not invest in a business which you cant understand. Strategy is important before investing. Unless you know what business youre investing in, dont invest. An investor has to first satisfy himself why he is investing in a particular business and at what price, also what is the target price he is expecting.

Strategy is also a crucial part of investing. The money for investment purposes has to be set aside for a particular class of assets. An investor also needs to plan in advance why he is buying for a particular event or for a long-term purpose.

Do not try to time the market and never ignore the risk of investing in equity timing the market is not going to prove right most of the time. Invest on a regular basis.

In a bull market most retail investors go for stocks on the basis of its past performance. Investor should always keep in mind that the past performance will not guarantee the future returns.