Prashant Jain on why now is the time to invest in equities

The current bearishness in equities is an ideal time to be accumulating shares, writes Prashant Jain, CIO and executive director, HDFC Mutual Fund , to investors in his monthly note. The core of his argument is that investors have always made handsome returns whenever they invested in a market at a forward price to earning (PE) multiple of 10-11 times.

For instance, investors who bought shares in September 2001 (immediately after 9/11 attacks), June 2004 (after BJP's unexpected loss to in the general elections) and November 2008 (in the aftermath of the global financial crisis), made 60-90% return on their investments over the next three years.

Excerpts from Prashant Jain's note:

"The values of the listed businesses as indicated by the Sensex are down by 20% between 2008-2012. This is despite a nearly 60% growth in the GDP (15% CAGR) and therefore a similar growth in the fair values of businesses over the same time. Consequently, one year forward P/E multiples have come down sharply from over 20 times in FY08 to below 13 times presently. These are nearly 20% below the long term averages.

Further, the P/E of the Sensex based on FY14 (Estimated) EPS of 1475 is nearly 11 times, which is close to the lowest multiples that Indian markets have traded at in the past.

It is true that the economy is currently battling twin deficits, but that is known to the markets. What will determine markets of tomorrow, are the deficits of tomorrow and expectations thereof, both of which chances are will be better and not worse than today.

Times such as present, when the markets are not doing well should actually be looked upon as a window of opportunity for savers to invest more into equities, so that when the good times come, there are meaningful investments in equities to reap the benefits from.

The lower the markets are, the bigger is the opportunity and the longer the markets remain depressed, better is the opportunity for savers. In a lifespan of investing of say 30-40 years, it is unlikely that the markets will provide many such windows. In the last 20 years there have been only 3-4 such windows."