Its really a worth of question. we are currently at the bottom of the sentiment in terms of prospectus. their is seem no any light even after such big dark tunnel of 4-5 years. but remember, thinking contrary always pays handsomely. when there is a lots of fears and darkness, one need to be bullish or at least positive, this is what the real rule of this game. so as i already write many times, we are at the point where the probability of gaining from circumstances nail the loosing one. so question remain, how far we can climb in the next 3-4 years, if things go accordingly. here is a calculation may be
As the markets flirted with
their low levels during the course of this year the one thing that was missing
was a feeling of complete capitulation and total apathy and panic setting into
the markets. Although It is expected that lows of around 15500 for the Sensex
and 4700 for the Nifty(for medium term) to hold and they have held till date none of these
events earlier during the year saw a sharp unrestrained fall in mid cap stocks
and also in a large number of infrastructure stocks which most investors had
been holding on with the hope of a bounce back. This phenomenon has happened
during the last few days and I have got a feeling in the market which is
similar to the period of January/February 2009 before the markets formed a
durable bottom and set the tone for the next up move.
I believe that the markets
are now ripe for contrarians investing as a vast majority of stocks are
underperforming and it is only the high priced defensives that are
outperforming. An analysis of the BSE 500 since the beginning of the year shows
that out of 500 stocks only 90 are up and the rest of them are down for the
year. —
So what
is the basic tenet of Contra investing-?
Uncertainties emerge in
global events, economic growth, government policy etc. All such events
converging today, creating huge opportunity for generating future returns. Thus current environment is apt for contrarian investment
The
reasons why a Contra strategy is apt at the current point of time are
—Most funds/investors are betting on the safest stocks. Top
holdings of mutual funds are all among the top 10 market capitalized companies
in India and constitute over 30% of total equity holdings .When these stock
don’t move, several MFs don’t perform in the short run and this kind of Risk
Aversion prevents more creative stock selection.
—Majority of stocks have not performed in the last 12 months,
although market is 20% down from the peak, several stocks are languishing much
below their historic high
—Economic growth is bottoming out and fundamentals can only improve
—Significant fear clouds judgment and impedes value unlocking and
Lot of high potential stocks cheaply available and a large number of well
Several well established stocks have seen sharp P/E reduction showing loss of
investors belief
Long term fundamentals of most of the stocks remain robust while
there are short term challenges
All this has led to high under ownership in a vast majority of
stocks. As a contrarian investor sudden drop in investor interest poses
an entry opportunity.
— As fundamentals change, the extent of under-ownership determines
the speed of appreciation
— A rightly timed investment into a under-owned stock can result in
quick gains
— Exit is easier when the herd comes in
The contrarian strategy is also applicable in investing over
market capitalizations where mid caps/large cap premium and discount varies
over periods of time depending on market sentiments. This switch between market
capitalizations is also a contra strategy which is largely favoring mid caps at
his stage.
The key is that contra investing is not value investing. The key is that when growth is contra one has to be a
growth investor, when value is contra one has to go growth.
The contrarian investment theme is often confused with the
fundamental or value investing. But it is a fallacy….It involves far more
complex thought process. It is a way of thinking
which is difficult to emulate.
• Contra investing also requires incubating
stocks for some time before they find favor with the rest of the market.
Proactively identify new investment themes and build up strong positions before
a majority of investors
• It is also important to Monitor stock/sector ownership and relate
it to the fundamentals of the sector. Get out of over owned stocks and get into
under owned ones. Avoids momentum stocks and over owned sectors, thus improves
risk profile
At this stage my key contra bets will be well established mid
sized corporates which strong brand franchises or business franchise which
might have some short term concerns that are leading to a severe mispricing of
the long term potential. If one takes stocks with a market capitalization of at
least Rs 1000 crores where stocks are down at least 60% from their peak values
or the valuation discount from the peak valuations are at least 50% a portfolio
of at least 20 high quality stocks can be easily built which on a buy and hold
strategy can yield at least 100% over a two year holding period.
However while evaluating such companies it is also important to
evaluate companies in a manner where there should not be a value trap as some
companies specially in the infrastructure sector have destroyed their balance
sheets via aggressive bidding and high Debt: Equity levels to such an extent
that there is very little tangible equity value left in these companies,
although the stocks might be cheap on a Price to Book basis. Again
to reiterate the value trap is the biggest folly in contrarian investing.
However on the flip side it is also true that post evaluation if
one comes to the conclusion that as interest rates ease off and cash flows
improve the debt burden can be reduced then one of the biggest equity value
creations do happen via the shift of the total enterprise value from debt to
equity while the overall enterprise value might not change. For example, let’s
say there is a company with Debt+Equity of Rs 10000 Crores out of which, on
today’s day Debt is Rs 8000 Cr and Equity is Rs 2000 Cr. Over the next couple
of years it can happen that the overall company value does not change but Debt
comes down to Rs 6000 Cr and Equity value goes upto Rs 4000 Crores. As such
equity returns can be 100%.
In January 2008 India's market
capitalization peaked at Rs 75 Lakh Crores and Market cap to GDP was at 160%
& in March 2009 the Market Capitalization bottomed out at Rs 30 Lakh
Crores.
Current Market capitalization stands at Rs 70 Lakh Crores and
Market cap to GDP is at 77% on 2011-12 GDP & 65% on 2012-13.
— Eventually as the bull market matures over the next 3-4 years, the
Market cap to GDP should approach the earlier peaks.
— India’s GDP in the year 2014-15 should be at Rs 135 Lakh crores.
— Assuming a mature and peaking bull market at that stage the market
capitalization could be at around Rs 200-220 Lakh crores.
— This implies a tripling of Market Capitalization from the current
levels over the next 4 years.
— Per annum returns could be at an average of 25% plus.
— The current bearishness and apathy towards equity could be one of
the best entry points for the Indian markets
Since it’s already become a big note on Contrarian Investing I
will write more on this subject later. However the value in the market is
tremendous today and selective buys at these levels will generate huge returns
over the next bull cycle.
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