With most market commentators highlighting the stretched valuations of equity indices, investors have become somewhat skeptical. What should the lay investor do? We believe in the saying ‘a bull market climbs a wall of worry’, and have a positive view about investing even at current levels.
Our arguments can be summed up in one word – ‘TINA’, which is an acronym for ‘there is no alternative’. TINA is firmly in play, driving the rise of Indian stock prices.
TINA is operating at three levels.
First, from an international perspective, there is no other large emerging economy that has better investment characteristics than India. Strong GDP growth, political stability, controlled inflation and negligible dependence on commodity prices make India an attractive emerging market among the BRICS.
Second, political risk in India is at its lowest in the past couple of decades. This greatly helps in planning for long-term projects and will attract large amounts of overseas investments.
Third and last, the average Indian can no longer invest confidently in real estate and Gold. Even a small diversion of savings from real estate to equity markets is enough to drive markets higher.
We believe this shift from real estate has just begun and will last for at least a few more years. As you can see, a lot of forces are aligned to support the valuations of equity markets.
This is not to say there won’t be short term pullbacks from time to time; the TINA argument works best on a medium-term basis. Investors should use those pullbacks to average their holdings by buying further at lower prices.
A final word on valuations - while the PE ratio looks stretched, the price to book ratio of the markets is still not overvalued. Bear in mind that the Indian industry is currently operating at its lowest capacity utilization in nearly twenty years. With excess capacity, there is lesser need for bank loans; leading to lower growth for banks.
Weaker crude prices are financing the government’s massive infrastructure spending, and the series of small and big reforms of past three years will sooner than later revive the economy.
Falling inflation and better infrastructure would enhance the buying power of consumers, leading to much improved corporate earnings.
We are convinced that valuations would start looking modest in coming years, and investors with an investment horizon of more than one year should invest with confidence.Disclaimer: The author is CIO – Equity, Global Asset Management at Edelweiss. The views and investment tips expressed by investment experts on Moneycontrol are their own and not that of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions.