?It?s only when the tide goes out that you learn who?s been swimming naked.?
?Warren Buffett
In times of extreme volatility, mixed with a dominating bearish sentiment and garnished with uncertainty in almost all spheres, age-old adages seem to offer solace to the investing appetite. Little wonder then, that wealth management and brokerage reports have been laced with aphorisms of the wise.
Suddenly, the same people who had rubbished the gurus, find themselves using their theories to their advantage. The one that goes out as being the most favourite is that of the legendary Baron Phillipe Rothschild, who once exclaimed that the time to buy was “when there is blood on the streets.”
At the moment, though, Warren Buffett?s wisdom about figuring out the naked swimmers holds more water, pun intended. For, investors have witnessed biggies like Bear Stearns, Lehman Brothers and even Merrill Lynch shed blood on the streets for their mistakes. And if such biggies have let blood, then many are worried about what the fate of the relatively smaller ones will be.
Setting aside panic
But clearly, there is hope. Authorities have stepped in and started to take charge of the situation and things are expected to look better from now on. Even though Jim Rogers, the commodities guru, who was in India recently said, ?They (the authorities) did not accept two years ago that there was a problem in the housing sector, they spoke on oath in the Congress. They said that the worst was over five times in the last two years, it has not yet subsided.? The current move is not an assurance but a demonstration of intent in action, says an investment banker. ?This time, it is serious?, he adds.
Experts in India also reckon that the impact of the Lehman Brothers incident was rather overstated. ?India?s fundamentals are in place. They might not be as exuberant as before, but they are strong and better than many other countries,? says Devendra Nevgi, CEO, Quantum Asset Management. Other experts point out that India has a low dependence on exports, an exports to GDP ratio of only 15% (the lowest in Asia) and that only about 15% of those exports go to the US.
Hence, even if something drastic happens in the US, India will be one country which will be able to withstand the reverberations better than many, even when there would be an impact of sorts. And the story in the US has not unfolded completely as yet. More tremors can be expected and the markets will be rather turbulent.
?One can expect situations of a 700 point swing on either side to become a way of life on the Street,? says Hasit Pandya, director HPMG Shares and Securities. Pandya reckons that there are more tremors expected. He says that there are more speculators present in the market, who are taking bets on a daily basis, rather than those playing on fundamentals. And in such times markets will likely take huge gyrations.
Clearly, for the investing community, it is a time to get extremely watchful and not panic. ?Sift the momentum from the value?, says Nevgi. What he means is that there will be rumours and speculations that will tend to drive stocks up or down and investors need to steer clear of rumour mongering. Locating true value
Most analysts and fund managers are of the consensus then in these turbulent times, there will be value picks available. And the reasoning is simple. India is set to grow, and even if it does not grow at the earlier pace of around 9%, lower rates will still generate enough prosperity.
The finance minister has already mentioned that the growth rate would be around 8% and this, according to him, ?is something many of the 150 global finance managers, would want to give their right arm for.?
Keeping this as a base, investors need to take a view of their portfolio and sift through businesses with a strong franchise, and which have a strong presence in the market, where there are enough opportunities for growth. Apart from this, it is the management quality that will be most important, Many of the companies that have been stalwarts in the past couple of years have not tested bear markets and a slower growth environment where there is a struggle to fund projects. In this light, a lot many companies whose balance sheets and numbers might look good may fall by the wayside.
A recent research by India Infoline suggests that investors need to be careful with the old norm of isolating value by watching for stocks with high dividend yield. ?Traditionally, high dividend yield stocks are considered ?safe havens? and are preferred by a particular set of investors. This happens more so when equity markets are in a bearish phase and growth stories are scarce. However, the pertinent questions to ask before buying are whether such high dividend yield stocks can sustain the current level of dividends and are they insulated from capital loss (attractively priced on fundamentals)??
?Value buys? can quickly become ?value traps?, says the report. Investors need to discern whether the high dividend yield due to fundamental ?mispricing? of the security is in a bearish phase and if growth stories are scarce. However, the pertinent questions to ask before buying are whether such high dividend yield stocks can sustain the current level of dividends and are they insulated from capital loss (attractively priced on fundamentals). And here the study reveals that around 60% of the companies in the sample face multiple earnings headwinds and should continue to carry a high dividend yield. However, the probability of making a capital loss is high from holding them and that can easily offset the returns in the form of dividends.
And there are others who take an ?out-of-the-book? approach to value investing and that is not just going by the numbers present in the balance sheet. At the moment, a lot many intangibles are not being valued in the balance sheet, the brands and the quality of systems developed, which can be difficult to replicate, are a few of them.
Investors can also look at several such options, especially in turbulent times, as the divergence from price and value is often heightened in such times. ?Take for example, a State Bank of India, much of the real value of its branches is not reflected in its balance sheet. And sooner, the International Financial Reporting Standards come into play, a lot will have to be taken on the books and this could swell its book value,? says an analyst.
Getting the balance
Moreover, argument again points towards the management?s ability to maintain growth in turbulent times. ?There is no rocket science here. In turbulent times, you need companies that can get past the same,? says a strategist with a leading overseas research firm. ?Yes, it may be looking back in the past and not at the forward earnings. But when the future is uncertain, it will be the past that will throw more light in taking an investment decision,? he adds.
Here there are several companies, the trusted ones that have weathered the past that will come into play. Blue chips and several others, who have displayed resilience in tackling downturns and still coming out unscathed that should form your core portfolio, say experts.
Chetan Parikh, director of Jeetay Investments Private Limited, a portfolio management firm and an investment expert reckons, ?In my view, there is value available in the market, but there is a huge market risk attached to it.? The market could still go down further and the same company will be available at a lower price and the converse is also true, he adds.
So to avoid the trap of waiting to time the market, something that few people get right, Parikh recommends a cost averaging strategy. This entails isolating a stock that will provide value over the long-run and setting aside funds that will be invested in the company on a regular basis. With this, the average cost of holding tends to be lower than taking chances on timing the stock price movement. ?It is also a good time to keep liquidity on hand to gain from bargains. But the core portfolio will remain based on equities with strong value propositions,? he concludes.