Bet on equity, by picking the right ones

Equities are in the doghouse right now — and it is the best time to go stock picking. Nevertheless, investors need to make the right bets when they go bottom fishing. one has to  focus on specific companies rather than sectors even though several verticals have looked very attractive in the current meltdown in the markets. The current market is safe for investing. However, the real pay-off will come from your ability to pick the right bunch of mispriced bets. Even though several sectors look interesting, it’s all about picking the stocks of the right companies. The retail investor must bring his own competency to figure out how much a company will make in the next five or seven years and whether he is paying a price higher than that or significantly lower than that. Since the start of this calendar year, the BSE Sensex has plummeted nearly 18 per cent from 20500 levels. One outcome of this fall and the recent volatility is that the character of market and investing has changed with investors now more focused on index movements even as they have withdrawn from the equity markets. Earlier, it was more of an investing market where investors did not bother much about index movements. Now the whole talk is about where global markets or local markets are headed. Investing is not about markets, but finding businesses or companies who can make a lot of money and buying a small piece of it. To me, Indian equities will remain one of the best-performing asset classes over the next decade, and the arguments are far more compelling now that the markets have corrected sharply from their highs. The lower the market goes the better for investors. This comes even as price-wise the markets have entered an “under-valuation zone”. The price to earnings ratio (P/E) for the Sensex has eased from a multiple of 26 to 27 to a multiple of under 14 at present. The long-term average PE (for Sensex) has been 14.5. Therefore, we have now entered a historical under-valuation zone and we have breached the average PE multiple.  However, are we close to the bottom? I cannot say that. However, if it tumbles to a PE multiple 10, we will have reached an absolute bottom. Investors have been spooked by the slump and are clinging to the sidelines, waiting for the storm to blow over. They are afraid to make a mistake and suffer big losses. In investing, you have to learn to pardon yourself for committing mistakes. Please do commit mistakes; an individual who commits more mistakes eventually becomes a sane investor.

A brief review of monetary policy of RBI

RBI announced its mid-quarter review of monetary policy today. The central bank has increased the repo rate by 25bps to 8.25% with immediate effect. With this increase, the operating policy rate is higher by 500 bps since the beginning of RBI’s current rate hike cycle.

Stance of Monetary Policy:

RBI has re-iterated its anti-inflationary stance. RBI stated that it is imperative to persevere with the current anti- inflationary stance since a premature change in policy stance could risk hardening inflationary expectations.

The tone of the monetary policy commentary however, appears much less hawkish compared to the previous policy. 

On the growth front, GDP decelerated to 7.7% in Q1FY12 from 7.8% in Q4FY11 and 8.8% in Q1FY10. IIP too posted a severe slowdown to 3.3% in July from 8.8% year ago. 

Monsoon so far has been normal.

The first advance estimates for 2011-12 kharif season point to a record production of rice, oilseeds and cotton, while the output of pulses may decline. In the next quarterly review, RBI is likely to revise its FY12 GDP forecast of 8% downwards to 7.7%-7.8% levels.

RBI remains concerned on potentially adverse global macroeconomic developments.

Inflationary pressures on account of persistent food inflation and some elements of fuel inflation will continue to keep headline inflation higher. 

However, going forward, demand-side inflationary pressures are seen moderating on account of several factors such as cumulative impact of past policy actions, improved monetary transmission levels and moderating growth momentum.

Given that non-food manufacturing inflation (which is closely tracked by RBI as a measure of core inflation) has a higher weightage in WPI as well as limited ability of monetary policy to address structural food demand-supply imbalances, the repo rate appears to be close to peak levels. 

While RBI may keep some buffer for possibly another hike in case demand impulses do not act as per expectations in the latter part of this fiscal, it is also widely expected that, in case of any potential external shocks, RBI would move swiftly and choose to focus on financial stability versus inflation.

Outlook: 

RBI stance of monetary action will continue to be based on the inflation trajectory going ahead as well as the trends in global macro-economic scenario.

 We expect an average WPI inflation of ~8.5% during FY12 and FY12 GDP at ~7.75%. Another 25 bps hike is not ruled out during FY12. The steady pace of monetary tightening last year has resulted in moderating capex and investment demand.

A sustained continuation of previous, current and future monetary transmission into higher lending rates could affect both consumption and investment demand, with lagged impact of the same spilling over into FY13 as well.