Learn right habits in india’s risky market

Learn right habits in india’s risky market

A casual observer might conclude that India is one of the most promising markets on the planet today. She would be wrong, mostly. Yes, the two main top-tier stock indices, the 30-share Sensex and the 50-stock Nifty 50, are at or near historic highs. Yet, there are large and persistent weaknesses in finance, manufacturing and job markets that are hidden by this Bull Run. Of the 30 stocks in the Sensex, less than 15, or half, can boast of a sustained increase in valuation. These include L&T, HDFC, ITC, TCS, Wipro, Reliance and so on. The largest lender, SBI, is in the red, as is the largest private sector bank, ICICI. The sector has been bruised by bad loans and fraud. Manufacturing companies like Tata Motors or Bajaj Auto, sputter.

First-quarter corporate earnings are flat. Unsurprisingly, the price-earnings (P-E) ratio of the Sensex, a measure of how closely equity prices are aligned with or unmoored from earnings, is now nearly 25. This is higher than the high teens attained during the dotcom bubble — a signal that equity is now driven by pure cash, not future earnings potential. Things are worse for mid-size companies. The Nifty Midcap 100 is down nearly 7% from January. Its P-E ratio is 47.3, a sure indicator of a bubble.

Investors need to tread warily in such a market. From April to now, overseas investors have sold heavily, but the slack has been taken up by domestic institutions. With bank interest rates, real estate and bullion no longer attractive, people have poured savings into mutual funds. A systematic investment strategy that averages the purchase cost by spreading it across boom and bust cycles, is the correct thing to do. Spreading funds across equity and debt funds is another good hedge. Any strategy based on immediate expected gains is hugely risky. Learning to diversify risk need not come the hard way.