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Nothing To Wait For

Whatever is bad today will remain bad for years to come. Investors should invest without waiting for things to change…

Last week, I wrote in this column that what we are living through is not a crisis but a new permanent condition. The prime cause of the panic that is sweeping the global markets is Europe’s insolvency. The second cause is that the political configuration in the US makes it highly that that country will be able to get back to decent growth rates. However, on a relative scale, India doesn’t look half as bad as anywhere else and there’s no reason to panic. If the outer world is going to be like this only, then the better we learn to live (and invest) rather than wait for some spurious end to a crisis.

Now that a few days have gone by and one can step back from the debris of the initial crash, the differences from the 2008 crash look even starker. In January 2008, when the decline in stock prices set off in earnest, the Indian markets were sitting at the end of a particularly long and thin limb. Everything was stretched, and everyone was hoping against hope that the party would continue. The financial crisis in the US was already on its way but we were passing around stories about we were immune to all that.

This time around, attitudes are in a curious reversal. There’s panic, and the panic exceeds any justification for it. Scarred by the huge shock that they had in 2008-09, investors are running scared, asking if it’s going to be like that all over again. The interesting part is that almost all fundamentals of the market are utterly different from 2008. Three years ago, we were in a raging bull run, today stocks have been languishing for close to two years.

I came across a very succinct summary of the contrasts with 2008 in a research note by Reliance Mutual Fund a couple of days back that I thought summed up the situation rather well. Here’s the gist of it. In January 2008, the previous six months had seen the Sensex return 25 per cent and the previous two years by 112 per cent. Today, the Sensex is a per cent or two here and there over both periods—basically, it’s flat and there have been no gains. This shows how we are very far from any kind of exuberance.

Since FII flows drive so much of the Indian markets, let’s compare those two. Back in January 2008, the preceding six months had seen FIIs invest USD 12 billion in Indian stocks. Today, the last six months have seen USD 3.7 billion flow in. Given the strong linkage between the markets and FII flows, the fact that there is a lot less short-term money in the markets is a comfort. In fact, given that there has been no momentum in the markets for a long time, there should be negligible momentum-driven money in the markets from all sources. But wait, it gets better—domestic flows also have a similar pattern. Domestic institutions brought in Rs 7,800 crore in those six months, but just RS 3,300 crore in the last six months. For equity mutual funds, the corresponding figures are Rs 29,000 crore and Rs 3,700 crore.

These are as far as flows go. On valuation of stocks, the differences were even starker. Today, the deviation from the historic average PE is about -4%, i.e., stocks are cheaper than they have been historically. In January 2008, this was +41 %--stocks were a lot more expensive than they had been. Compared to other markets too, valuations are not that high. The point should be clear to everyone—the number on the calendar is not 2008, but 2011. Whatever is bad today, will stay bad for years or decades to come so there’s no point waiting. In every other way, the investment environment is actually quite good. There’s nothing to wait for.