In the beginning of 2012, when the stock markets were in a similar doldrums as they are now, Gopal Agrawal, CIO of Mirae Mutual Fund had argued that the markets had bottomed out and it was time to buy (Indian stocks have bottomed: Mirae Asset). He was proved right because the markets rallied thereafter and gave investors handsome returns in 2012.
Now it is the turn of Neelesh Surana, Head Equity of Mirae to say the same thing. In his article in the Financial Express, “Negatives Factored In Valuation“, Neelesh Surana points out that the markets are over-reacting to the negative factors. Investors are reacting irrationally to events by placing too much weight on current events. The effect of an overreaction is that stock prices are pushed to abnormally (high or) low levels in the short to medium term though they adjust to the intrinsic worth in the long term.
Neelesh Surana points out the recent correction has been triggered by concerns regarding slowdown in overall growth (particularly the investment cycle), current account deficit, sticky consumer price inflation, and caution ahead of the forthcoming elections. However, one needs to segregate the cyclical issues and the structural issues and examine whether sufficient steps are being taken to sort out some of the structural issues, he says. He points that the Government has been pro-active and is attempting to rectify some of the core structural issues as is brought out by the oil pricing reforms. While this will spike inflation in the short-term, its long-term effects are significantly good as it will improve revenue to the Government, help curtail deficit, and improve market sentiments and disinvestment possibility. The other problems such as the current account deficit are also being resolved by a series of steps, he says. The subdued commodity prices is a big advantage and the structural growth drivers are still intact given the consumption nature of our economy.
The most important thing, Neelesh Surana says, is that many of these problems have already been factored into the price of the stocks and the risk of a further downside is reduced.
To support the hypothesis that a lot of the negatives are factored in the valuation, Neelesh Surana points out that on an aggregate basis stocks are trading at about 30% lower than their long-term averages. He also points out that the current price to earnings multiple (P/E) of 13x forward earnings is low and attractive. The effect of this is that many decent businesses (with a return on investment (ROI) above 20%) are quoting at near their all-time lows.
Neelesh Surana urges investors to take advantage of the situation by explaining that while sustained market declines can be unsettling, market declines are cyclical and thus natural. Investors must follow a well-disciplined asset allocation with planned diversification. Investors with patience will get meaningful returns as soon as there is an uptick in growth, earnings, valuation, and flow into equities.
Note: Neelesh Surana and Gopal Agrawal co-manage the Mirae Asset Emerging Bluechip Fund and the Mirae Asset India Opportunities Fund. In the Emerging BlueChip Fund, their favourite stocks are Federal Bank, Amara Raja Batt, ICICI Bank, ING Vysya Bank, IPCA Labs, Gateway Distripacks, Divis Labs, Zee Entertainment and Mothersum Sumi.