r2i forum

http://india.seekingalpha.com/article/26281

In conclusion, although I believe that the BSE Sensex is currently over-valued, the Indian economy remains stronger than it ever was. And on midnight of August 15, 2007, India will definitely bring in its 61st year as an independent nation. I would love to stay and partake in the enormous growth India has to offer; but as far as Indian equities are concerned, I?m ready to pack my bags and leave.

also this is the sensex the author is taking about which is 30 stocks. I read an article which said 14000 crore was lost in the IPO'[s over the past 6 months. Its downright ugly with real estate stocks now , down 25% from peak and many other sectors. coupled with rising rates I think there is lots of pain to come..

Hi all

I do remain bullish on equities as longer term wealth creating proposition. True there are risks but as someone said investing in equities is risky but not investing is even more riskier !!.

Instead of looking at stock markets as Las Vegas one needs to make a life long commitment to learning about financial markets and invest in equities directly if you have the expertise/patience and the guts / willingness to stomach any fluctuations [also called bear phase] that may linger for much longer than what you might call short term.

For those not having expertise in directly investing, Mutual Funds give an alternative option. True there are risks with mutual funds also for the equity based ones do invest in stock markets but the actual investing in stocks is handled by the fund managers who possess more expertise in this and are paid to do this for their bread-and-butter. Also with the right expectation in terms of returns, risk taking ability and time-horizon to stay invested one can make inflation beating returns with Equity Mutual Funds in India. Investing small amounts every month and staying invested for at least a 5 year timeframe would mitigate the risks associated with equity mutual funds.

The Performance of Key Stocks in different sectors determines the Sensex / Nifty not the other way around. Also there would always be stocks that are not INDEX Stocks which can still give good returns over the longer term and these may not necessarily be restricted to Small-Caps and Mid-Caps.

Needless to say diversification is the way in terms of investing in Stock, Bonds, Mutual Funds, Fixed Income Instruments and of course taking pure term-insurance where the objective is not returns but only insuring for death and total permanent disability.


Regards

Venkat

I agree to the premise of investing in stocks or MFs with the long term view. But, it beats me why anyone is bullish currently on Indian stocks and MFs. Almost all the Indian analysts are bullish on Indian stocks. I do not know how much credence we have to give to the Indian analysts and MF managers though. No offence please! What I am saying is we do not have MF manager that has beaten the market for 15 yrs or a sage investor like Warren Buffet, in India. A lot of mutual fund managers in India are fresh out of college who have seen stock market only in their BUS 123 or whatever course they took. They are no Bill Miller or Marty Whitman.

When I do some math, it really beats me why anyone is bullish on Indian stocks. Normal P/E for US stock market is 15-18%. For, India, the P/E should be 12-15%, given the higher volatility, risk, interest rate etc. Currently, Sensex is trading almost double the normal P/E, about 24%. Growth patterns are never straight lines. Most of the growth stories take a dip before moving further. Given that, there is tremendous risk at P/E of 24 for Indian stocks.

Growth is a very complicated animal. It is a reinforcing force due to positive feedback. During the growth cycle, companies can easily post good results. It is difficult to have good visibility during growth phase. For example, during the dot com time, company x will hold the stock of company y, and post the growth on stock y as part of their earnings. Company "y" can do the same with the stock of "x". Theoretically, both can grow each other in tandem without any real growth. I am no expert, but someone has to really look into the numbers to see how much is real earnings and how much is the reinforcement. For example, in the following link, there is a statement for the 3QFY07 earnings of Bajaj Auto,

"Infact, had it not been for the 51% jump in other income, net profit growth would have been an extremely muted 4%."
You have to read this as "Real profit growth from selling products is 4%. The rest is hawa".
http://www.equitymaster.com/stockquotes/mkt_com/mktcom.asp?mktdate=1%2F22%2F2007

I do not know whether due diligence is given by analysts to analyze the earning statements or whether irrational exuberance prevails. Again, I am no expert.

Indian MFs have high front load and expense ratio. Typically, front load is around 2.25% and expense ratio is about 2.25%. This is another disadvantage with Indian MFs. The MF charges and fees are significantly higher than US funds. We have to pay a higher fee for relatively less expertise of management. And, USCs cannot invest because of PFIC.

layman: small quibble with your post - P/E ratios are ratios, not percentages.

To come back to the original topic, I think the sentiment in India is a little more complicated than just bearish or bullish.

Rather than the kind of unmitigated euphoria that prevailed in 1999-2000, this time the herd feels that although there might be a correction they will be able to (1) get out in time, or (2) that the correction is just a speed bump on the road to Sensex 25,000. Whenever the Sensex is having a down day, the media outlets regularly post comments by "experts" suggesting that each dip is a buying opportunity.

Its actually quite a surreal experience in India right now - everyone is bullish, yet everyone knows a correction is imminent. The mantra for this bubble is "the long term India story is intact". When the Sensex is dropping like a stone, apparently the collective Indian investment community says this mantra to themselves a hundred times and they feel a calming effect, and immediately they start buying stocks and things recover. :)

On a side note - Times of India has launched a "India Poised" campaign - complete with its own song and endorsement from Amitabh Bachchan (anyone remember India shining?). Media outlets and campaigns have long been known to be reliable contrary indicators - hence, I fully expect a crash. :-)

gheeboy, thanks for correcting. I know that P/E is ratio. Did I drink too much when I posted this?:emwink:

I also beleive the long term story of Indian stock market is good. But again, it could turn out to be a farce!!!

I can list some reasons.

(1) Country's growth need not be converted directly to growth in stock market and vice versa.

This is a myth and already has been disproven in the case of UK. In the past 100 yrs UK has gone down from "sun never sets" to "UK, where is it?" status. During this period its stock market returns has been more than that of developing countries. In the case of India, how much did the stock market grow from 1950 to 1990? We did develop considerably from 1950 to 1990 in terms of industrialization, agriculture. One can come up with the reasons for this but still this is a fact.

(2) Long term competency of Indian stocks are questionable

There is difference between the stocks of developed western nations and that of India. The stock of a western nation is a corporation but in India it is more of a "Kanthan" instead of a corporation. We have Tatas/Ambanis/Birlas instead of IBM/GE/Cisco. I can surely say that in my grandson's time an Ambani will be running the Ambani group of companies. (Remember Russi Mody getting kicked to bring in Ratan Tata, how about the duel between Mukesh and Anil Ambani?). Same thing cannot be said of an US or European company. Warren Buffett or Bill Hewlett will enthrust responsibility of running their corporations to people outside their family discarding their own children. The shareholders will have tacit control of most of the western corporations now and in my grandson's time. The western model is suitable for long term growth and health of a company than the Indian model. For increasing family wealth, Indian model is the best.

(3) Shareholders may not benefit from growth of their company.

In India, since corporations are one man show or "Kanthan" operations, the owners are not worried about increasing the wealth of individual investor or shareholders. They can issue more stocks in the name of themselves and take the benefit of growth only for themselves. This is called share dilution. Again, for increasing family wealth at the cost of the individual investor, Indian model is the best.

So, in essence, even if India grows, the stock returns need not grow for an individual investor. I have focused on only one thread of "stock return vs country growth". There are more concerns such as accounting practices (GAAP vs no GAAP), energy dependence (what if oil goes to $100)...etc. I have not discussed those concerns since each of them is a complete thread by itself.

Media is definitely having a heyday in India. Indians at young age are very high in number now according to demographics. They can be easily influenced. Normally, the elder population helps sanity to prevail. But now, the elder population is stunned because they do not have sufficient experience and history in stock markets. So, it is paradise for media, analysts, brokers etc. In a way the positive mentality is good but it should not turn irrational.

The unprecedented bull run in last 4 years has led the market to rise almost 5 times in as many years. Expectations have been unrealistic - valuations overstretched by any standards. Markets have been struggling for last few months even though they made new highs but that lasted temporarily.

RBI Interest rate hike could not have come at worse time than this for Indian stock markets. It may send jitters in the markets when they open tomorrow. Results are not expected to lift the markets and have already been discounted in current prices.

Looks like inflation and politics are going to pop the overhyped party in India.

Banks, Auto, RE, FMCG may be worst hit. Tomorrow and days to come may cause mayhem in Indian markets.

Popular stunts by our politicians are leading us to nowhere. First they ignored inflation for many months, increased taxes - all kinds of taxes to fill govt coffers on hyped up boom - that added to inflation and now considering recent losses in state elections and upcoming UP election they are over-reacting to inflation.

RBI can never be independent of south block in India. FM allowed (well supported by PM) to run the inflation numbers high and now they are getting RBI to pop the party in the name of inflation control. Not long ago the FM was saying inflation under control and resisting any idea of rate / CRR hikes.

Today the call money rates have reached 70-75% due to lack of liquidity. Industry has built additional capacities due to overhyped Indian middle-class demand etc. Demand is being curbed by high interest rates and liquidity squeeze. It will impact the bottomlines for many Indian companies. Some of them have made mistakes to acquisitions at wrong time and at completely wrong prices.

Many MFs have given negative NAVs and returns to unsuspecting investors (who are least protected in India). Investors are worried of an impending blood bath on Indian bourses in next few weeks. Hopefully there wont be another Tsunami in Indian markets that will get into a vicious circle and have devastating effect on the economy in the short term.

Sensex witnessed the second biggest intra-day fall on Monday. The bears went on a rampage after the RBI tightened monetary policy on Friday by raising short-term lending rates to contain inflation. All sectoral indices were trading in red. Auto stocks plunged over six per cent.

Sensex closed near its intra-day low; at 12,455.37 points, losing 4.72 per cent or 616.73 points through the course of the day.

Nifty closed at a loss of 4.92 per cent or 187.95 points, to end at 3,633.60. Earlier, Sensex had fallen by 826 points on May 18, 2006, its biggest intra-day fall till date.

Rs 1,50000 crore gone in a day

I also beleive the long term story of Indian stock market is good.
Budget balance as % of of GDP (March 31 2007 data)

USA -2.2%

India -3.5%

Consume Prices (feb'2007)

USA +2.4 (feb), +3.6 (year ago), +2.3 (expected in 2007)

India +6.7 (Jan), +4.7 (year ago), +5.0 (expected in 2007)

Real Pay % increase on a year earlier

India (2nd from the top) more then 6%

USA less then 2%

Do you still believe? IMO Fiscal/monetary policy needs to be changed to cool down the Indian economy. We don't want to see high (or hyper) inflation in India.