Why equity looks good for more?

Markets have witnessed a remarkable recovery in last few weeks and have rebounded from lows of September to reach new all time highs in November (Sensex.) The economy appears to have bottomed out and trade data has been very encouraging which has led to sharp recovery in rupee after it touched an all time low of over Rs 68 per dollar. Even corporate earnings for Q2 FY2013 were better than expectation with very few earning misses. FIIs have also reinforced their belief in Indian equity as evidenced by strong buying witnessed in past few months. They have invested $16.7 billion in CY2013 till date.

While equity investors are rejoicing, we are sure that a number of you are left wondering whether this is simply a liquidity driven rally or is there more to it. Another question that comes to the mind is whether there is further room for markets to perform in medium term. Let’s try and answer some of these questions.

Currently markets are trading at 15 times FY14 earning which is reasonable. We have historically traded in the band of 10 (extreme pessimism) to 26 (extreme Euphoria). We did some research in which we found that if we take out FMCG, Pharma and IT sector out then Sensex is trading at 12 times FY14 which is cheap. We feel that there is immense value in quality midcaps and smallcaps which has started to outperform in last 3 months and can continue for a long period as they are trading at a substantial discount to Sensex. There are two triggers which are driving markets. One is easy liquidity from US in form of Quantitative Easing and other is building up expectation of Modi led NDA government at centre. If this happens then Sensex could be at a much higher level from current levels. So we can keep our figures crossed till May 2014 Assembly elections.

We feel that time has come for reaping the benefit of investing in Equities and keeping patience for last 3 years. Even in last 1 year Equity as an asset class has outperformed Gold (Negative return) and Real-estate (Liquidity crisis). We feel in next 3 to 5 years Equity has a chance to outperform other asset classes and give much higher returns. Our confidence comes from the fact that retail investor is running away from Equities as witnessed in redemption of Mutual Funds. In last 3 years net outflow has been 20k crores. Markets cannot peak without euphoria which is unseen in retail investors.

We reiterate our belief in underlying strength of Indian economy and equity and recommend clients to stay invested and add for better returns in coming times.

By Siddharth Mandalywala– Vice President(Value Addition) – Concept Securities Private Limited