Sensex near all time highs! Still no retail participation!?
Retail investors exiting equities The sensex is at 20000 levels, just around 5% from its all time highs, But, there is no participation from retail investors. In fact, retail investors are exiting the markets and if history is anything to go by, this signifies a further rise in the markets. Let us analyse why retail investors are avoiding the markets. In January 2008, when the global financial meltdown unfolded itself, the world's stock markets went into a tailspin and our markets were no exception, with the Sense( crashing from 21200 to 7700 in a matter of 11 months, a fall so steep that even veteran investors lost confidence. The retail investors, who predominantly invest in mid-cap and small-cap stocks, saw their in-vestments being wiped off almost 80% in a short period. Even though later the front line stocks moved up, as reflected in the rise in the Sensex and Nifty, the broader markets never recovered much, Many of the high beta segments, like real estate and infrastructure, which had ballooned in the earlier bull market, never recovered at all and so the retail confidence still remains completely shattered. In the last five years, there has been a continuous inflow of negative news, like the fear of European countries defaulting one after the other, domestic issues like GAAR, retrospective taxation, and the government's general inaction and policy paralysis, all of which made the markets nervous and volatile. Unable to digest this volatility, retail investors were exiting the markets at every rise.
Even now, around five lakh mutual fund equity folios are being closed every month. Flls remain bullish But, in spite of all these issues, sensing India's long-term growth story, foreign institutional investors were buying heavily in the Indian markets, Since the sell off in 2008-09 the His have pumped in nearly US$57 bn into the Indian markets. in 201 2 alone Flls have pumped in nearly US$24.3 bn and in rupee terms it comes to 1.28 lakh crore. This is the highest the Indian Stock Markets have ever received in any calendar next to 201 0 and the highest share of Eli money among Asian countries this year.This has moved our markets higher in spite of selling off by domestic institutions and retail investors. Currently Indian markets are driven by Fll money and their flow will be very vital for our markets to sustain the uptrend which we are seeing now. Even in this first month of 2013 we have already received more than one billion US dollars till 8 January, and if this continues unabated, we are sure to see an all time high in our indices in the immediate future! Positive Signals from the Government has finally broken its policy paralysis by announcing a slew of reforms. Some of the measures will have a huge positive impact on the economy, over a period of time, like domestic LPG subsidy reforms and the direct cash transfer of other subsidies, FDI in retail is now a reality and soon FDI in insurance and pension funds will be hiked. Railway passenger fare hike across the board after a decade reconfirms Government intention on re-forms, I hope the Government will come out with sensible pricing in PSU dis-investments, similar to what they did in the NMDC issue, so that good response will flow from all segments of investors. All these measures will infuse confidence among all sections of investors and also remove the fear of rating downgrades from international agencies.
Valuations at historical lows Historically, the Indian markets have seen bubble-like valuations during the peaks of previous bull markets, be it the Harshad Mehta scam of 1992 or the Ketan Parekh tech bubble of 2000, when the P/E touched 54 and 34 respectively. The markets could never sustain such high valuations and eventually they crashed. In the beginning of the bull phase that started in 2003, the PiE of the Sensex was only 13.5 at Sensex levels of 3000 in five years the markets rallied to 21000 in January 2008, and the valuations touched a high of 28. And the earning of our companies in the Sensex, or Sensex earnings went up from 280 to 775 during this period, which meant that the markets went up on strong fundamentals. The current P/E of the Sensex is only 15, and if you see the one-year-forward consolidated FIE, assuming even a 10% growth in earnings, it is only 13.5, which is on the lower side of fair valuations. So, this is a great opportunity for investments. Historically the PIE has never fallen below 13 except in the market crash of November 2008, when the P/E touched 10.36 In the last five years, we have had huge issues, both globally and domestically, but if you compare the markets in January 2008 and the present, the earnings of the Sensex have gone up by 50% but the Sensex is still down 5%. Going forward, earning growth will improve on reduction in interest rates and general recovery in the economy.
If that happens, there is scope for PiE expansion from current levels. So, markets will go up on earning improvement as well as on FIE expansion in the coming days. Markets in 2013 Already we have seen markets going in for time wise correction in last five years where excess valuations of 2007 have been corrected. There is a very good chance of earnings improvement in the future. Moreover abundant liquidity is available globally, with investors searching for places to park their funds which can give them reasonable returns, as the global interest rates are at very low levels. Domestically too, I feel optimistic as retail interest will again start coming in when investors see markets stabilizing. And, as the first signs we are already sensing retail interest in the oversubscribed primary issues like "CARE Forced selling from State- owned insurance companies and other financial institutions will also abate when dis-investments of PSU's are priced sensibly so that they do not need to bail out PSU disinvestment issues. Policy action, ample liquidity, attractive valuations and improvement in macroeconomic fundamentals are going to drive our broader markets. Overall, we are going to see good activity in the secondary as well as primary markets. If things go well as we expect, then 2013 may well be the base year for the start of a new multi-year bull phase in the Indian Stock Markets!
[An overview of the market ahead by MD of Capstocks & Securities India Pvt Ltd.]