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Dizzy Heights - Action Plan At 20000 The word 'risk' seems to have evaporated somewhere in thin air. In Aug '07 when the markets were in correction phase, all sorts of negative news made lot of sense to all - sub prime, political uncertainties, crude oil, falling dollar, etc. The sentiment was very negative. All the above mentioned negatives are very much still there. Sub prime problems don't seem to be getting over at least in the near future. On the political front, congress seems to be preparing hard for re-elections though have conveyed something else. Crude oil has touched life high of $96. Dollar continues to fall. What has changed is only 'sentiments' - and that too just because we are experiencing a sharp rally over last 2 months. If India's good corporate results & roaring GDP figures is the reason for the last 6000 point rally in 2 months, I think since last 4 years India's results & GDP numbers are buoyant quarter-on-quarter. So again, nothing has changed in last 2 months, its only sentiments due to rising markets because of massive liquidity. How strong have FII inflows been? In year 2006, FIIs were net buyers at Rs. 35971 cr. In the first 8 months of 2007 (Jan-Aug) FIIs pumped in another Rs. 35380 cr & believe it or not - in 2 months (Sept - Oct 2007) FIIs poured in another Rs. 36273 cr. This huge liquidity has taken our markets to these unexpected levels. What have the Mutual Funds been doing? Mutual Funds are net sellers since 15600 levels. Since 7 Sept' 07 to 1 Nov '07 Mutual Funds are net sellers at Rs. 3191 cr. How costly is the market currently? Following is the Sensex P/E (Trailing) of last 3 peaks:
Current estimated EPS is Rs. 800. Considering the July '07 peak PE of 21.00, the current sensex peak should have been 16800. Considering the highest PE peak of 5 years Bull Run of 22.48 (May '06), the sensex peak should have been 18000. Remember we are talking about peak PE. If markets corrects to the Aug '07 PE level of 18.41, then the bottom should be 14700. What crap - you must have said. Right? But in stock markets 'kuch bhi ho sakta hai'. If 14000 to 20000 is possible in 2 months due to FII inflows, why not back to 16000/15000/14000 if we see huge FII outflows? In that case we would still quote at PE of 18 which is reasonable & not cheap at all. Just to re-collect the memories of last year - May 2006. Markets were gush with FII inflows. Rs.35766 cr net inflow pumped by FIIs from 1 Nov '05 to 10 May '06 (6 months). Talks of India getting re-rated were making rounds. Correction seemed illusive. But who would have anticipated what was coming next - 29% fall in span of 25 trading days? Sensex tumbled from 12612 (10.5.06) to 8929 (14.6.06). PE fell from 22.48 (then highest of 3 year Bull Run) to 15.58. So don't ignore the risk totally. And especially now after the new regulations of P-Notes, FII inflows will not be as buoyant as before. At Brain Point we switched out at 17800 & 18300 levels at PE of 23.00. Few investors do ask us - didn't we switch early? At Brain Point we believe that along with recommending you 'FUTURE WINNERS' in Equity Funds to maximize your returns our job is also to minimize your risk by switching out of overheated market. At PE 23.00 we switched out at the then highest PE of last 5 years Bull Run. Two months back in Aug '07 no one - in India & outside India had expected 17000 & 18000 levels to be reached in 2007. And now in Nov '07 at 20000, people are talking about 25000 by Dec '07. Hence it is said: "The Euphoria generated by the bulls is often accompanied by mass amnesia. This makes even seasoned investors forget the risks associated with a rising market". Can India's PE get re-rated to a much higher level? The key is the liquidity. Fundamentals rule in long term, but liquidity is always the King in short term. We may see sensex at 25000 without a correction. This would mean around 25x multiple for March 2009 earnings and will shoot the current PE to over 30x which will be very hugely stretched. Any underperformance in corporate results could see a great panic & huge money can be lost from such staggering levels in a short span of time. Are you ready to take this challenge of high risk - high return? If yes, keeping investing in Equity Funds at these premium levels. If no, have patience. And if you have been investing in Equity Funds since 2003-04 and that too in the funds which proved to be 'FUTURE WINNERS' after you invested, you should feel happy for having made great returns. There are many investors who fall prey, to the panic - greed factor by investing at high levels & selling low - because they follow trend - herd mentality. But then, what next? Where to invest then? In 2007, many Mutual Funds have launched International Funds. These funds invest in best quality stocks across the world. And they are doing a reasonably good job. So, if India continues to quote at super premium levels, these international / global funds (Principal Global Opportunities, Birla SL International Fund, Fidelity International Opportunities etc) can provide us with alternate option of reasonable risk - reward vis-à-vis Indian equities. Before I end this article, I would like to quote a famous saying by Sir John Templeton: "Bull markets are born on pessimism, grow on doubt, mature on optimism & die on euphoria". |
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