A Matter of Spirits

Recently, we covered midcap stocks that are still reasonably priced. Given the way the Indian equity markets have been rising, if there is any hope of finding good, reasonably priced stocks, then that has to be not in the mainstream, but in some obscure corner of the midcap basket. We were able to locate ten stocks that fit the bill. You can read detailed analyses and the case for investment for these stocks in the December 2014 issue of Wealth Insight.

However, as it often does, the process of identifying these stocks was itself an education. There are very few stocks of this kind left in our equity markets. One has to cast the net far and wide to come up with any reasonably-priced investments. The stocks we have identified are those whose valuations have stayed at a reasonable level largely because of the scorching pace of growth they have have set.

The upshot of all this is--and I'm not happy to say this--but there are very few value investing opportunities available today in India's stock markets. Make no mistake, the headlong 50 per cent rise that we have seen in the last 14 months have ensured that there are no obvious opportunities in stocks. Everything is fully valued, and the easy money that was waiting to be made since 2010 has been made. From now on, stock prices will rise in fits and starts because the fundamentals do not justify a sustained rise.

Although that sounds like a confident statement, it actually isn't. It's entirely possible that we are on the cusp of a different kind of a situation and that we are transitioning from one kind of market to another. By that I mean that for the next few years, stock prices will run on optimism, fuelled by expectations of future growth. On the face of it, we have been here before. Isn't this similar to where we were in 2004 or 2005? Superficially, we are. However, there are many differences.

If one looks at some of the factors that drive economic growth, then we live in a different world today. In 2004, interest rates were 6 per cent (9 per cent today), oil was 40 dollar a barrel (80 today) and that dollar itself was just `45 (62 now). These three numbers alone mean that the situation is much tougher and growth will come with greater difficulty. On top of this, the years that followed 2004 were characterised by historically easy global liquidity. Money was easy and in some currencies, it appeared to be practically free. As we all know, some of the apparent growth and stock market returns of the years that followed were an illusion created by these extraordinarily benign economic conditions.

Those days are gone and business conditions are not going to be as easy ever. However, to my mind, this is a good thing from the stockpickers perspective. Picking long-term winners is easier when the conditions are tough. Think of judging the quality of a cricket player. If someone scores a double century on a flat pitch against a second-string bowling team, what does that prove? That's like all those heavily-leveraged winners from the 2006-07 era. The businesses that prove to be winners in the years to come will be much more resilient.

Moreover, there is a huge positive factor today that wasn't there earlier, and that is the optimism that has been generated by the political changes that have occurred. We have a government that is focussed on driving economic growth and in general, solving problems. To a great extent, economic growth is a matter of 'animal spirits', as the economist JM Keynes said. The belief that good times are coming itself will play a big role in ensuring that good times indeed come.