Investment opportunity knocks again!

Great investing requires a lot of delayed gratification - "It's waiting that helps you as an investor, and a lot of people just can't stand to wait". - Charlie Munger

Markets have corrected sharply by about 11.10% from the recent high of 8,996 on 3rd March 2015 to 8,097 on May 6, 2015. Typical of markets, within a matter of less than 3 months, market participants are trying to force fit reasons explaining the correction.

Three months back, none of these factors were on markets' radar. While not many market participants can pin point any one particular reason, some of the commonly cited reasons are FIIs pulling out money, concerns over valuations around March 2015, no clear signs of pick up in capex, tepid and patchy consumption demand, concerns over pace of recovery in corporate earnings, and 'impatience' with key structural reforms such as land bill and GST.

FIIs are pulling out money due to concerns over ambiguity in taxation/retrospective taxation. This is reflected in outflow numbers. There is availability of other attractive investment destinations like China (no there-is-no-alternative factor at play now), after clocking handsome gains in India

What we think of the recent correction and market's reaction

We see it as a bull market correction giving a long awaited investment opportunity to investors, who did not fully capitalize during the upturn. Markets ran up 'too fast, too soon' without meaningful correction and a sobering was due.

There has been a shift from exuberance about reforms after results to doubt and dejection about the pace of reforms in just less than a year. Market participants do not doubt the 'intent and resolve' of the government; only the sentiment is that the government is not moving at the pace which markets want.

We see it as impatience, the fact that the government did not have majority in Rajya Sabha was known to markets. Despite that, the government managed to get the hike in FDI in insurance and mining bill through. Coal blocks and telecom auction have been successfully completed in a transparent manner.

It is true that markets are skeptical about government's ability to get land bill and GST passed. (Lok Sabha has passed GST). We believe these two bills, if passed, can bring in lot of efficiencies and expedite project execution on the ground.

Valuation – A mature correction just in the nick of time
Just before the current correction, on 3rd March 2015, Nifty was trading at about 30% premium to its long term average trailing valuations – Markets had run up too fast too soon, and earning growth was not keeping pace. Premium valuations along with lackluster near term growth is the prime reason for the pullback.

We see the current correction as a healthy bull market correction, setting the stage for continuance of the bull market for longer. After the correction, now we are trading at about 17% premium over long term average trailing valuations. To put it in perspective, we were trading at about 10% premium even in May 2014. Lower interest rates and pick up in government spending augur well for corporate earnings.

Message to investors –Second chance to invest

Most predominant reason for retail investor's disillusionment about equity has to do with fear and greed. There was greed in March 2015 (Nifty at 8,996) and fear in May 2015 (Nifty at 8,097); not much has changed on the ground in 3 months.

The confidence has been restored, and this is the second chance to invest. While we were getting cautious in March, the current correction has removed froth. This is the time to add to equity allocation with an absolute return perspective.

We may see some more pain in terms of time correction but there is opportunity to make smart money by taking calculated risk.

Ritesh Jain, CIO, TATA Asset Management Ltd.

Disclaimer: The views expressed in this article are personal in nature and in is no way trying to predict the markets or to time them. The views expressed are for information purpose only and do not construe to be any investment, legal or taxation advice. Any action taken by you on the basis of the information contained herein is your responsibility alone and Tata Asset Management will not be liable in any manner for the consequences of such action taken by you. Please consult your Financial/Investment Adviser before investing. The views expressed in this article may not reflect in the scheme portfolios of Tata Mutual Fund.

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