Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Commentary

An update on the "stock bubble"

It seems I have something wrong in my criticism of Mark Mahorney’s post. I’m not sure what the answer is, but I’m sure Mark will enlighten me soon enough – I don’t claim to be any good at analytics or statistics, so I’m sure there’s something I’ve screwed up in. Heck, I’m willing to learn.

But there’s a clue! It’s one of the items in bold. Shrinks the field. What do we have in bold?

FIIs account for only 25% of our market trades. Well, I must say this sounds significant. But it’s not – they have ALWAYS accounted for around 25% of our trade, since the last six years or so (I have detailed data for three). The stock market went up only in the last two years. So they haven’t gone significantly berserk in the cash markets, at least not more than the retail investors have. That means they haven’t accounted in any greater amount for the increase in interest in the stock market – I would attribute retail increase to greater visibility through investment based TV channels, fund ads and magazines, and through a more spread out broker network (thanks to the ‘Net trading getting popular from 2003). So what I meant there was: FIIs haven’t accounted in total for India’s stock market growth, as I thought Mark said; so my feeling is that if they turn their noses at us, we won’t keel over and die.

But how, really, do FIIs affect us? Let’s look at the possibilities:
1) FIIs exit the market: A complete exit would mean serious selling, and yes, that will pull the rug off under the market. But FIIs aren’t stupid; at least not all of them are. The hedge funds may pull out – they account for around 10% of the FII money I have been told – because they want to hedge elsewhere; that’s a downside that I believe the market will easily take in it’s stride. The remaining FIIs will, at max, sell a part of their holding; they’ll still retain interest because the fundamentals they invested in have not changed.
2) FIIs don’t pump in more money: This happened all through June and July. The resulting volume drop dropped prices a little bit, with spikes or sharp drops in prices (because of dull, single point probing trades). But largely, the market remained rangebound; if it hit lows there would be a glut of buyers, and there wouldn’t be much activity at the highs. If more money doesn’t come in from the FII bazaar, there will still be retail money in the market – as the FIIs found to their disadvantage in July. The retail investors, figuring out that 9,000 was low enough, pumped in more money into mutual funds and direct stock buys, which triggered FII buying because heck, nobody wants to be left behind.

So in toto: I don’t think that FIIs will change our market drastically. Hot money, aka Hedge Funds will leave perhaps; but their loss won’t leave too many tears.

Around 48% of our stock market is from retail trade. True, and this is quite scary because the retail market is a domino bazaar. One panics and all of them fall – and the recent FII pull out seemed to signify exactly that. Remember, when most FIIs are saying they’re “downgrading” India, it’s time to buy. Because they’re just manipulating the market so it will come down and *they* get to buy. (If I were an FII pulling out, I’d shut the **** up and take the money off the highs. I’d create a scene only if there was something in it for me, meaning “buy”)

So, 48% being retail is bad? Uhm…it’s always been that way. Even MORE than 48%. Through the ups, downs, sideways, whatever – India has always been ruled by the retail and Indian institutional trade. So the fact that 48% is retail means little; for very little has changed in that statistic. That explains why the market goes down with panic; and you will also understand that the bubble hadn’t yet started when I made that post. Today’s a different story, I will come to that later.

Also Most of the retail trade is from day-trading. This is interesting – since retailers can short-sell (FIIs cannot, neither can institutions) day traders can make money either way. So day traders don’t mind a bearish market either, which is a significant negative – they won’t “up” the market as it goes down!

I’d also said people are still investing simply because the corporate growth is still strong. I can’t find that a problem, but yes, a global slowdown will mean slower growth and therefore lower forward P/Es. Yes, that means there will be a revaluation of the high P/E stocks (I pretty much said that as well).

And that means there will still be stocks that beat the index because of their undervaluation even in today’s market. But think before you buy! For instance, would you buy a motor vehicle stock like Maruti now? It has a P/E of around 16, and has done very well in the last quarter (0606). But car loans are up with interest rates, at around 13.5%. Plus, petrol has gone up, and their diesel variants are not seeing the light of day till Jan 07. Not worth it, in my opinion!

Well, I don’t know what’s wrong with my post, but it’ll probably be a statistic that’s proved to be the undoing in the past. There’s one thing though: India’s a very different market, like some of them FIIs have found out; and it’s suicide to ignore that if you’re investing here.

Coming back to the markets: They’ve gone to 11,500 (Sensex) today. That’s a near 7% increase from August 8, the date of my earlier post. Whoops. That looks like a bubble! The specific stock I mentioned – Balaji Telefilms – is upto Rs. 133 – a 15% increase in 10 trading sessions. That’s crazy! Yet, the stock seems fairly valued at a forward P/E of around 12, but still 15% in 10 sessions means there’s a build up that could mean a short term fall.

My overall suggestion: Hold. The market looks like it will fall very soon, to around 10,000 again. (My prediction is that we’ll have a further 5% upside from here on momentum, and then psssssssstt. I don’t like momentum predictions on a per-stock basis) So pick up good stocks again as they get undervalued.

My recommendation for Balaji Telefilms is to stay invested and buy on drops (below Rs. 125).

And I’ll post more when I find out what Mark has to say.

Note: I started off with a “sell” call, but have since realised that short term falls and gains are fairly irrelevant to the longer term investor. So hold until the fundamentals show signs of reversing; otherwise this is still a good market to invest, FIIs or no FIIs.