Thursday, August 27, 2015

morning thoughts...

The markets remained highly volatile and now moves into an f/o expiry day with more volatility ahead
2008 was a terrible year for the Indian stock markets. The Sensex witnessed two big single-day corrections that year. The first was in January when the Sensex had peaked post a massive bull run spanning 2003-2007 and then began to feel the tremors from the subprime crisis in the US. The index lost 7% on a single day that January. 
The second big single-day fall that year came in October when the Sensex tanked 11%. This was post the bankruptcy of Lehman Brothers in mid September 2008 that sparked a massive sell off across global equity markets. 
Investors now have another day they won't likely forget anytime soon. On Monday, 24 August 2015, the Sensex shed around 6%. This time, trouble brewing in China triggered the meltdown and let most global indices deep into the red. 
Having said that, the recent correction in the Sensex by no means makes the valuations very attractive. Those looking to go bargain hunting to capitalise on the Monday crash may not bag the gains they hope. 
The Sensex's price to equity ratio currently stands at 1.6. To get a perspective, this ratio reached 1.9 during the dot-com bubble. It's not just that stock prices have run up. The return on equity for most companies has reduced. Indeed, the index companies' return on equity is now down to 13.5%, the lowest in 20 years. This has been largely due to a slowdown in the Indian economy with reforms yet to deliver in a big way. 
This is different from what we saw during the 2008 global crisis and the stock market rout that followed. The earnings of India Inc were still growing at a healthy pace. Return ratios were quite strong. As a result, the massive correction that took place provided a very good opportunity to pick up good quality stocks that were literally on sale. Indeed, post the Lehman collapse, the price-to-equity ratio had dropped to below one. 
In 2015, stock prices and consequently valuations had shot up considerably. Thus, the recent correction has not necessarily made all stocks cheap. Many, if not most, remain expensive. That is why we don't recommend going bargain hunting or bottom fishing for stocks right now.
We are of the view that you need to stick to companies that have strong business models. Businesses with strong earnings potential even if India's economic recovery has yet to accelerate. Now, earnings growth will certainly improve once an economic recovery gathers pace. So post the recent correction, if these stocks are attractive from a valuations point of view, it would make sense for you to pick them up. Whether more corrections are around the corner doesn't matter. If valuations are still expensive after the crash, then it makes sense to keep away. 
Astrologically Mercury enters in sign Virgo on August 23, 2015. Mercury produces auspicious results in this sign, because it is its own sign. Transition of Mercury in Virgo will strengthen the power of expression of people. They will experience a new and refreshing energy in their speech. Their patience is also likely to decrease sometimes and they want to complete every task quickly. Their sense of humor improves.

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