Ab kya hoga...

Literally - what next? Is this the question that you asked your broker recently? You are not alone my friend, several people (including seasoned investors) are pondering over the same question over the past few weeks given the sideways movement displayed by the key benchmarks namely the NIFTY 50 (or the stock of the nation, as they advertise) and Sensex (BSE’s much touted 30-share index).

Why now you may have asked yourself and again when everything looks fine at the surface, corporate results in Q2 FY2008 seems to be decent (what with sectors such as infrastructure notably construction, cement, properties and retail reporting > 30% YoY PAT growth); telecoms reporting >50% YoY PAT growth and lastly key bank stocks (again reporting >30% YoY earnings growth). Yes, there were black sheep spotted in sectors whose revenues depended on exports. No prizes for guessing – textiles, auto (mostly component exporters) and yes IT – software (mid-tier) has seen some notable headwinds on their growth story. But overall, everything seems fine isn’t it, or is it?

Conflicting signals…
The market seems to searching for cues. And ordinary mortals like us depend on market gurus for direction. But what happens when gurus are divided. Or to put it simply what happens when fund manager who speak on CNBC – TV18 tell us that investors need to be cautious while they invest at these levels. Easier said than done, isn’t it.

We believe that though there is room for optimism, indeed there are signals on the macro front which compel us to ponder over what the doomsayers predict.

For starters, our economic growth already shows signs of easing a bit, and experts warn us about the so called ‘soft landing’. To recap, India recorded a Q2FY08 GDP growth of around 8.9% as against 10.2% (wow) growth recorded same period last year. In fact, till Q1FY08 our GDP growth was a sound 9.3%.

Secondly, and most importantly, markets seems to be euphoric (or gloomy) longer than what reality of the matter is. This has been witnessed historically (1997, 2000, 2003 and yet again late 2007).

Thirdly, they say, that numbers don’t lie. What we mean is that, a glance at valuations of companies, be it blue chips, premium mid-caps or small caps, are in disarray. You can find extremes in these markets.

For instance, most frontline home builders / real estate where all the euphoria is at the moment, are trading well in excess of 25x FY2008 earnings and around 20x FY2009 earnings, on average. There has been a dramatic change in valuations of these players over the past few quarters. To cite, DS Kulkarni Developers has witnessed earnings multiple expansion over the last two and half years from 7x 1-Yr forward earnings to around 14x 1-Yr forward earning in 2007.

This has been the case for most of the favored sectors in 2007, including cement, infrastructure, banks (including financial services) and to some extent media.

On the other hand, certain sectors are greatly out of favour. Not without reason though. IT – software would be a case in point here. Frontlines in these sectors are off their highs by around 25-40%.

Guru focus

So with all this haze around us, what should be the game plan for 2008 you may ask. Well we don’t have Aladdin’s magic lamp yet and therefore would rely on what stock gurus would foretell.

But again, the same original questions would haunt us. What if the gurus are in conflict over the direction of the overall market?

Web portal Business Today’s 27th November 2007 “Instant tip” have notable investment professionals still bullish on what hold in 2008. (Details can be accessed here ) while Sanjiv Duggal, touted by media as ‘India’s biggest bull’, has changed stance on where the market is headed over the next 18-24 months. (details of what he thinks can be found here ). He believes that Indian markets are headed south over the next two years as a result of global slowdown and hefty valuations that are prevailing currently.


Finding value

We believe in our motto. One can find value in any market (bull or bear) by being disciplined, which is easy to understand and difficult to practice. But believe us, practice is the key word here. We are trying hard to do precisely that. We hope to get across these turbulent times by having faith in our ability to spot the underdogs, have patience in their business models and of course the wherewithal to swim across the tide.

Over the next few weeks we would want fellow novice investors to learn about our model portfolio and also some of our learning that we would incorporate while trying to make some money of the Indian stock market.


So stay tuned…