Long
term investors however, need to stay invested to benefit from Bull
market...!
by
Mr. NIMESH SHAH, ICICI Pru. MF
Indian
share markets are trading around their life time highs, propelled by
strong liquidity flows.
How
ever, this jubilation has led to some frenzied buying in select
stocks. We would advise exercising caution now than be sorry later.
Mr.
Warren Buffett, one of the world's richest men and legendary investor
says: “Be fearful when others are greedy and greedy when others are
fearful.“
Equity
prices are soaring to alltime highs, driven by strong flows and we
have experienced that flow-based markets often become volatile in the
short term.
Valuation
appears expensive..!
The
trailing price-to-earnings (PE) multiple for S&P BSE 500 Index is
currently at 26 and more than a quarter of stocks are trading at over
40-times trailing 12-months earnings the highest ever. To get a
perspective, in December 2007, the median PE for the S&P BSE 500
was 21, and 24% of the stocks were trading at a PE of over 40.
However, we are strongly convinced that current equity market
valuations can soon get realigned to historical valuations, as and
when earnings growth materializes.
We
expect strong earnings growth going forward. However, when stocks are
trading at a PE of 4060, the growth in the immediate years is not
that important, what matters is whether the company can sustain high
earnings growth for an extended period.
Earnings
lag expectations..!
The
earnings growth expectations have not been in-line over the past
three years due to a host of factors, including a slowdown in
discretionary consumption and lack of credit off-take following
stringent asset quality review by banks.
However,
there's optimism that it may rebound strongly going forward, due to
positive macroeconomic factors and a steady recovery in the economy.
Many
large companies have spare capacities which are yet to be utilised.
This
can enhance tremendous operating leverage in the economy, without
incurring much capital expenditure in the immediate term.
The
single digit Returns on Equity (RoE) are at their lowest in decades
and can only rise from the current levels. Reforms like the Goods and
Service Tax may result in positive gains going forward.
Realign
your portfolio..!
As
equity prices are hitting all-time highs, investors often tend to
become greedy. But it is time to rebalance portfolios. During this
interesting and dynamic environment, products such as dy namic asset
allocation balanced funds need attention and consideration, to help
investors navigate through a volatile terrain.
Dynamic
asset allocation funds provide exposure to both debt and equity.
These funds are very dynamically managed: The exposure to either of
the asset class is based on its relative attractiveness at any given
time.
The
markets have mostly factored in this year's earnings growth, so from
a short-term perspective, market valuations may appear expensive.
However,
for long-term investors, these are times to remain invested, as
Indian economic growth soars to robust 7%-plus, making it the fastest
growing emerging market globally.
A
wide political mandate has given scope for bold economic reforms,
setting the stage right for good times in Indian equity.
About the author..
Mr. NIMESH SHAH is MD and CEO at ICICI Pru. Mutual Fund.
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