The Hindu Business Line : The smiling markets

The Indian stock market has never had it so good. Whether it is through FIIs, MFs, portfolio management schemes or directly, money is pouring in. But tread cautiously, say market analysts.

A stock broker exults in the rising fortunes on the bourses.

"The king of Saudi Arabia recently came to India not to see our Republic Day ceremony. He came to see what is happening to the Indian economy and where he can invest his personal money in the equity market. He has one of the largest portfolios in the world; some of his money is already here and more is pouring in," says Arun Kejriwal, Director, Kejriwal Research and Investment Services.

Hardly six months ago, media houses appropriated most of the hoardings in Mumbai, as the megapolis saw new entrants such as DNA, HT and Mumbai Mirror. But these days it's the mutual funds (MFs) that scream at you. "Because the market may go up and the market may go down," reasons the latest offering from Reliance Mutual Fund, while Tata Equity Opportunities talks about its 11th dividend from hoardings put up every few km.

I find people treating equity investment like a slot machine. RAHUL REGE

And the money is just pouring in; either through the FIIs, MFs, Portfolio Management Schemes (PMS) or directly. As Rahul Rege, Senior Vice-President at Sharekhan, puts it, "When the Sensex goes to 12000, I'll probably get more money than I would have got when it was 4000. It's stupid but true."

The fund manager is sitting on a boiling hot seat, identifying good stocks. ARUN KEJRIWAL

But, adds Kejriwal, "satisfying the client at 12000 will be more difficult than it was at 8000. But convincing a client to put money at 12000 is the easiest. You give him just 30 seconds and he'll invest, but at 4000 you might have given him 30 hours and he might have refused to invest."

Every broker or research analyst you talk to in Mumbai is talking about the Sensex correcting by "1000 or even 2000 points", though nobody has a clue when this will happen, because of the staggering liquidity, and new fund offerings (NFOs) mopping up thousands of crores of rupees.

Just one Arab Sheik investing in our equity will shake up the markets. SANDEEP PRESSWALA

Sandeep Presswala, Chief Operating Officer at IL&FS InvestSmart, Mumbai, says that his interaction with the CIOs of MFs has "revealed that they have collected huge amounts from recent NFOs and collectively sitting on over Rs 10,000 crore in cash. And 22 more NFOs are coming out in March and April, with a couple of funds going overseas to raise money. Imagine what will happen when all this money is invested."

On the continuing northward climb of the indices he says that while at one level everybody says the market is fairly valued, at another there is huge cash waiting to enter. "And then the general euphoria is giving a `missed out' feeling to those not invested in equity."

Bullish on India

He too confirms that from West Asia, particularly the UAE region, local investors - "forget the NRIs" - are looking at India. "After 9/11 and the more recent events, investors in West Asia are becoming averse to the US and European markets. Also, the Indian economy is growing much faster than those economies and everybody is talking about emerging markets. China is a black hole; nobody knows what is happening there. So that leaves India, and they're saying the days of financial scams in India are gone."

He says that India seminars in Dubai are generating a huge interest. "If all that money comes in we'll have a serious problem; just one big Sheik from West Asia investing in Indian equity will really shake up our markets. The kind of money they have is humungous."

So what should retail investors do at such times?

If anyone is looking at equity for 3-6 months, he should not invest. MOTILAL OSWAL

Says Motilal Oswal, Chairman and Managing Director, Motilal Oswal Securities, "They will have to be focused on the long term, because in the short term there will be volatility. This is the fourth year of bullishness, something that our markets have seen after a long time."

When asked if the market is reasonably valued, he says with a smile, "The market is never reasonably valued; it is either underpriced or overpriced."

Though Indian companies will continue to do well, "and we're positive on the long-term outlook, the period of fabulous gains is over. Investors need to be very selective and have a stock specific approach at these levels. If somebody is looking at equity for 3-6 months, he should not invest; he needs to have at least a two-year horizon. Investing today and getting money tomorrow is difficult, if not impossible, in today's market. You need to be in the right stock and where valuations remain reasonable."

Though few sectors are undervalued, he is bullish on the PSU banking sector, cement and selective infrastructure and two-wheeler stocks "where the price earnings are around 10 or 12 or less." He cautions those who do not understand equity and yet want to invest in equity to choose from a range of MFs and PMS schemes.

Surely the days of free lunches and the low hanging fruits are gone. SANDEEP SHENOY

Sandeep Shenoy, Strategist at Pioneer Intermediaries, Mumbai, also advises caution for the retail investor, pointing out that markets tend to swing from "depths of despair to euphoric highs and we are probably at euphoric highs right now. I don't say this cannot become spectacular high; that might happen. But caution is the watchword."

He adds that if one is not "an adept or astute investor, I'd go to the extent of saying stay away till rationality sets in; it may take one, two or six months, but don't feel you're getting left out or missing out. In stock market, nobody misses out. Ultimately one who makes a compounded annual growth rate of 15 to 20 per cent over five years or more is a big winner. So be happy with 15 or 20 return and allow the law of compounding to work in your favour."

He points out how investors who felt they had missed out on the technology boom in 1999- 2000 and entered at very high levels, took years to come out of that carnage. "I'm not saying good companies are not there, but finding them will be difficult; and surely the days of free lunches and the low hanging fruits are gone."

Shenoy also underlines the need for patience.

"The patient investor is always successful but the problem is that everybody. your friend, your neighbour, etc have made 100 per cent gains and you feel you are missing out. But what counts is that at the end of five years you're still there, making a consistent 20 per cent annual return. Your friend who's made 100 per cent might not even be there as an equity investor."

Have Patience

For the astute investor he suggests beaten down sectors and stocks. "Today, oil is in the depths of despair, so buy from a basket of oil stocks. There are counters in pharma such as Ranbaxy; it's a good company that will bounce back sometime or the other. Biocon is another good company with a good product but I think it might have one more year of vanavas. But you should tap such companies, and sit on them. They may try your patience but hold on."

From the PSU banks too, he'd bet on "strong regional banks with rural focus, such as IOB, Allahabad Bank, Syndicate Bank and Vijaya Bank."

Most of the equity experts agree that even though the indices have moved up sharply over the last 18 months, not everybody has made money in the retail segment. Rege says the only people who have made good money are "those who have sat on their portfolios; but this is a minority. The majority of people have either traded or exited early; in fact more people had gone short than long in the market. Even today, when you talk across brokerage houses, you'll find a lot of people short on the market at the retail level. They believe they're hedging but they end up getting caught on the wrong foot."

To the retail investor, he has one simple message. Have a plan, understand your risk profile and then invest, as you would in any business. "But, I find year after year that investors don't learn from their mistakes. After holding investor seminars for years, I don't think much has changed; the only thing I see around me is trading. I don't say trading is bad. But it requires a different mindset, a high degree of skill and discipline. But I find people treating equity investment like a slot machine. Just because you've taken delivery doesn't make you an investor."

Correction Eexpected

So is a correction on the cards?

Kejriwal says this is overdue. "It will happen sooner than later, and the earlier it happens the better, because expectations are rising very fast and entrants at these levels can get hurt very badly." His message to retail investors: "Turn cautious and book profits. Look for growth stocks and new ideas. If you can't find any, relax; the year has just begun." He also cautions MF investors from selling in existing funds and entering NFOs. "This makes no sense; get out of a fund only if it is sector specific and you are bearish on that sector."

The raging bull on Dalal Street has created a bigger dilemma for both MFs and PMS managers. As Kejriwal puts it, the fund manager is sitting "on a boiling hot seat, and having a tough time identifying good stocks. "If he doesn't invest, he's an underperformer; if he invests and the price doesn't rise thereafter, he's in a problem. To find value at 10,700 in this heated environment is not possible."

Even though Presswala has asked his colleagues to caution new PMS entrants, and ascertain that their expectations are reasonable, both he and Rege agree that the dilemma is "ki paisa aa raha hei tau lena chhahiye (if money is coming in, we have to accept it)." This is an opportunity and we are in the market to raise money."

Response may be sent to rasheeda@thehindu.co.in

Picture by PAUL NORONHA

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