The markets’ flirting with the Sensex, which crossed 18,000, has created a dilemma for small investors. As during the previous bull run, they have started wondering whether they have missed the bus or is it still a good time to invest. Beyond the Sensex, the prices of several leading stocks have crossed the high they reached during the previous bull run – raising the question of whether they have reached the bubble zone. A correction seems to have eluded those waiting to enter as and when it happens. A selective approach to investment should therefore be the best thing investors should consider for now.
As per the World Economic Outlook of the International Monetary Fund, the global economy is expected to grow at a decent 4.1 per cent this year. Investor confidence is high with a near-consensus among analysts that the recovery is for real. It is a different matter that I fear consensus the most. The markets have weathered worries about the withdrawal of fiscal stimulus, the Greek crisis and the possibility of a double dip recession in the world economy. The markets have actually reacted positively to the monetary tightening resorted to by the Reserve Bank of India twice.
The reason for this may be positive data such as global manufacturing growth hitting a 70-month high, clear signs of job growth in the US and the growth in American consumption. Indian data has also been consistently good so far. Both exports and non-oil import numbers imply strong domestic as well as external growth. Firms see a revival of pricing power and plans to expand capacity. The quarterly earnings are likely to be the best so far. But the higher input prices may start to hurt the margins. The classic example of this would be RIL’s failing to meet market expectations. The country’s strategy for further growth depends upon five key interlinked macro-economic assumptions – inflation, interest rates, the monsoon, crude oil prices, and the possibility of the developed economies not relapsing into recession.
Inflation is the chief worry, with the capability to derail the economy. It is likely to be moderate in the second half of the year. It is too early to worry about growth due to rising interest rates, as proved by the bull run of 2003-07. However, the story is slightly different this time. The yield on 10-year government bonds in March 2004 was 5.2 per cent, compared to 8 per cent today. The deposit rate for 1-3 years was around 5.5 per cent, compared to 6.5 per cent today. The credit deposit ratio was 5.5 per cent in February 2004, compared to around 71 per cent today. Money growth was 14.5 per cent in February 2004, compared to 16.4 per cent today. The fiscal deficit was 3.99 per cent in 2004-05, while the projection is 5.5 per cent of GDP for 2010-11. Interest rates might therefore be considered high for the current stage of the cycle. All this implies that the current recovery may differ from long expansions we have seen in the past. The expansion may be strong, but it is unlikely to last long.
Investors will therefore have to review their investment strategy off and on. The days of buy and hold seem to be over due to increasingly shorter bull runs. The money flows to the markets are also more investment-oriented
Investors will therefore have to review their investment strategy off and on. The days of buy and hold seem to be over due to increasingly shorter bull runs. The money flows to the markets are also more investment-oriented than the speculative hedge funds type flows witnessed in the previous bull run. With a growing population, increasing domestic demand and high growth potential, India is the country that best fits the strategy for foreign investors with almost zero returns on the money parked by them elsewhere. But the markets are not decoupled from the US. Investors are advised to give a closer look to the sectors that have not yet participated in the current market upsurge and concentrate on value picks.
Insecticides (India) Limited
(CMP – Rs 143)
The company’s business is formulation of pesticides and manufacturing of technical pesticides. It has an excellent distribution network throughout the country. Its formulated pesticides consist of pesticides, herbicides, fungicides and plant growth regulators. The technical pesticides are the basic active ingredients used for making formulations. Advance Crop Solutions Ltd is a wholly-owned subsidiary. With brands such as LETHAL, VICTOR and THIMET, the company is the fastest-growing insecticides manufacturer and declared excellent results for the quarter ended December 31, 2009. The results for the period of nine months have shown remarkable growth of 36 per cent in sales and 45 per cent rise in net profit, compared to last year. The net sales and profit figures of nine months of the 2009-10 year have already exceeded the figures of the year ending March ’09. With book value of Rs 80, dividend of 20 per cent and the trailing 12 months EPS of Rs 21.68 discounting the current market price by just a PE of 6.64 as against the industry PE of 17.20, the stock is an excellent value and growth pick.
The author is retired as Professor from the University of Delhi in 2024. He is an alumnus of IIM Indore and holds a PhD from the Delhi School of Economics. An investor activist and former member of various SEBI committees. He taught Capital Markets and Investment Banking at leading business schools of India.
