Thursday, January 16, 2014

Should you buy shares now?

Should you buy shares now?

July 18, 2005 09:12 IST

The stock market is on a roll.
The champagne is flowing amid euphoric visions of yet another uninterrupted bull run.
And, like in all euphoria-driven markets, the bar has been raised here too; there is no dearth of those who believe theSensex will top 8000 points by the end of this year.
ImageKnow what this means? The prices of your shares will keep rising and those who have invested in the stock market will be a happy lot.
The Sensex might well achieve this dream target, considering it has already crossed the 7300 mark and given the kind of Foreign Institutional Investor inflows being witnessed.
At the moment, the belief is that it is the Japanese funds that are coming into the Indian market. Given Japan's negligible interest rate and its wariness of over-exposing itself in the Chinese market, the Indian market does make for an ideal destination.
Nevertheless, it might make good sense to look at a few irritants that still remain.
Simply put, while one agrees that the economic outlook appears promising, one cannot help but wonder if this bull is going to last for long. So before you consider buying shares, take a good look at what is happening around.
It's time for everyone to make money!
1. The IPO boom
During a bull run, when money is freely flowing, Initial Public Offerings begin to crawl out of the woodwork. And, this is normally a sign of trouble ahead. Fly by night operators come out with IPOs, take investor money and then disappear.
Historical evidence suggests that this normally flags the end of a bull run. 
However, the caveat this time around is that at least thus far, the companies that have ventured into the primary market have been those with some semblance of respectability.
Here, the Indian market regulator, the Securities Exchange Board of India, merits praise for the way it has monitored the flow of seemingly dubious companies with IPO plans.
Hopefully, the floodgates will hold out.  
A word of caution though: tread cautiously when when investing in an IPO.
2. The mutual fund boom
Given the euphoric market conditions, and the fact that everyone wants a piece of this cake, it comes as no surprise that equity mutual funds have been lapping up public money through what their distribution agents label 'Mutual Fund IPOs'.
Ironically, many of the investors equate an issue at Face Value with lower risk. The thinking is that why buy a mutual fund unit at Rs 50 if you can get one for Rs 10.
They are blissfully unaware that both, the funds with a high Net Asset Value and a brand new fund with a Rs 10 NAV will be investing in the same stocks in the same market.
If nothing else, the existing high NAV mutual fund is at least a proven performer already.
To understand this better, read Go long term with your mutual funds.
What you should be wary of
1. Don't get fooled by the mid-cap boom
On the secondary market front, a closer scrutiny reveals that, barring the last month or so, it has been the mid-cap and small-cap stocks that were driving the market-rally.
Market capitalisation of a company is its share price multiplied by the total number of shares. Based on this, companies are classified as large-cap, mid-cap and small cap.
While many large-caps of today were mid-caps at some point of time in the past, even the biggest optimist in the Indian market would be hard-pressed to explain what is driving up the prices of some of these stocks.
Alarmingly, fund managers too are getting sucked into this cesspool with some of their portfolios they manage becomingly increasingly mid-cap oriented.
Mind you, the objection here is not so much directed at the size of the company, but its pedigree and the associated risk. 
Even those with short memories will remember what happened to the stock prices of some much touted infotech companies in the aftermath of the stock-market crash of 2001.
2. Look at the ratios
The P/E multiple of over 15 for the Sensex as it stands at the 7300 plus points level is by no yardstick cheap.
Let me explain.
Price Earning Ratio = Market price / Earnings Per Share
A high PE company is one where investors have hopes that earnings will rise, which is why they buy the share.
Now, lets say you add up the price of the shares of all the 30 Sensex stocks.
Then add up the EPS of all the 30 Sensex stocks.
Now, divide the total price by the total EPS and you have the Sensex PE.

However, at such levels, shares are definitely overpriced. Even for the FIIs whom we, as a nation, seem to revere.
Given that there is no dearth of more attractively priced emerging markets across the globe, the FIIs could well turn out to be fair weather friends and pull out the money they have invested.
If that happens, liquidity will be severely hit causing the current bull run to run out of considerable steam.
3. The oil factor
Yet another deadly irritant that the Indian market has chosen to sweep under the market for quite some time now, is the crude oil price upswing.
Mind you, this is off-season as far as crude oil is concerned. The danger here is that, its flip side could uncoil vindictively at a time when the Sensex moves up even further and finally the market cracks under its own pressure. 
Were oil prices to cross the $70 mark, the pressure on an oil import dependent nation like India would be unbearable. 
4. The political factor
Never forget the impact political turmoil has on the stock market.
Right now, undercurrents exist within the ruling coalition government with the largest two players shadow boxing over the disinvestment issue.
A long political shadow over the stock market has never been benign in nature, and there is no reason to believe that this time around it should be any different.
To conclude, I have been around long enough not to underestimate the strength of a bull run that is fuelled byliquidity and the backdrop of an economy on the ascent.
However, the irritants I have enumerated in this column merit mulling over.
Evaluate your risks carefully when investing in the stock market. The market eventually and inevitably will turn around. When that happens is anyone's guess.
Ashok Kumar heads Lotus Knowlwealth, a Mumbai-based wealth management firm. Write to Ashok.
Illustration: Uttam Ghosh

Ashok Kumar


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