Prominent fund managers say a bull run is sustainable if reforms take place. And a long-term approach will help the intelligent investor
India’s stock markets and investor community gave an emphatic thumbs-up to the Bharatiya Janata Party (BJP) which came into power with a clear mandate in the general elections, results of which were declared in May 2014. After securing the highest number of seats by any party in 30 years, the BJP saw another round of success in the recently concluded assembly polls in Maharashtra and Haryana. The optimism has been fuelled by Prime Minister Narendra Modi’s promise to create more jobs and bring India back on the high growth track. Several brokerage firms and global banks believe Indian equities could see a sustained bull run if structural reforms are introduced. The Sensex even rose to a record 27,354.99 points on September 8 before a correction took place due to rising global economic concerns. (It later hit 28,000.)
In this context, as part of the fifth Forbes India CEO Dialogues: The Leadership Agenda, top fund managers and investment gurus discussed whether the markets had run ahead of the economy. Bharat Shah, executive director, ASK Investment Managers, Parag Parikh, CEO of Parag Parikh Financial Advisory Services, Raamdeo Agrawal, co-founder and joint MD of Motilal Oswal Financial Services, Saurabh Mukherjea, CEO (institutional equities) at Ambit Capital and author of Gurus of Chaos, and Ratnesh Kumar, MD of Standard Chartered Securities, discussed issues from market capitalisation to dividend distribution tax. Excerpts from the discussion moderated by Senthil Chengalvarayan, editor-in-chief, Network18 Business Newsroom:
Senthil Chengalvarayan: Despite the stock markets having corrected five percent from the top, we are among the best performing markets in the world. However, the average investor, over the past 20 to 30 years, appears to have missed out on making money. What’s your advice to a regular investor who wants to create wealth? Mr Shah, have the markets run way ahead of the economy, and does that matter?
Bharat Shah: It is the business of the markets to be ahead of the economy. To my mind, what we have seen in the past few months has covered the undervaluation. But we are not really buying markets—we are buying stocks. I don’t think that businesses in general have run ahead. An item worth Rs 100, which was available for Rs 60-65 a few months ago, now sells for around Rs 95-98. I am satisfied that the kind of businesses that I would like to invest in for five to 10 years are not particularly expensive.
Senthil: Ratnesh, the markets expect 6 percent GDP growth in five years and an 18 percent increase in earnings over the next five to 10 years. Is the optimism justified?
Ratnesh Kumar: Are we ahead of the future potential of the economy? I don’t think so. The inflection point has happened; confidence and sentiment have returned. But how far these can take the economy, companies or businesses is hard to estimate.
Current earnings estimates have not changed since the government assumed power. So, if I look at valuations and where growth can go, my conclusion is that the markets are yet to capture the substantial recovery in growth. We need more evidence of that and it will be visible in the next six to 12 months.
Senthil: Mr Parikh, what is making the markets so optimistic? Is it betting on what one man can do?
Parag Parikh: After three decades, India has got a leader who has been elected by the people. [Prior to Modi taking charge], the markets were down and out, but now the sentiment is bullish and the recent state elections have given another indication that there is one person who is leading from the front. But why are we judging the markets? We are suffering from sample size neglect [too focussed on index-based stocks], which is making us question whether the markets have run up a lot.
Senthil: Can we put the average investor who has lost out on making wealth on the right track?
Senthil: Mr Parikh, you spoke about value traps. How do you avoid them?
Senthil: So how do you increase liquidity in the system?
(This story appears in the 28 November, 2014 issue of Forbes India. To visit our Archives, click here.)