Retail participation in the Indian stock markets, however, is declining since the past decade. The retail turnover, in 2003. was a healthy 84% but declined steadily to end at 34% in 2013, a 10-year low.
They say to invest in the stock markets for the long term. Bombay Stock Exchange's (BSE) Sensex has delivered 15% CAGR over the last 25 years but anyone who invested at the peak of 2007 would have lost nearly 60% of value in less than a year.
"Thus, whilst over longer time horizons, the odds of profiting from equity investments are very high, the same cannot be said of shorter time frames," Gaurav Mehta and Karan Khanna of Ambit Capital, in a reported titled 'Can 'value' investors make money in India?' say.
The markets are shallow, without much retail investor participation and punters are known to sway stock prices to trap the gullible. Even as the Indian stock markets continue to scale new heights, retail participation is dipping steadily.
The retail turnover, in 2003. was a healthy 84% but declined steadily to end at 34% in 2013, a 10-year low. Indian stock markets have been supported largely by the foreign money which has actually gone up by 47% in the given 10-year period.
According to World Federation of Exchanges (WFE), Bombay Stock Exchange (BSE) stood had the 10th best market value among stock exchanges around the world.
In November last year, the BSE and National Stock Exchange's (NSE) Nifty rose a stellar 41.6% and 42% in a year. In the same period, Nasdaq rose 19%, NYSE by 12% and Shanghai Stock Exchange by 18.7%. The only stock market that came close to the performance to that of India's was the Shenzhen Stock Exchange, at 41.5%.
The Indian markets have climbed down from those highs and as on March 2014, BSE was up 33.2% and NSE by 33.6% as against Shanghai SE and Shenzhen stock markets with 84.3% and 88.3%, respectively. WFE data shows.
This surely means that investors are looking at India as a good investment opportunity. And with the institutional money flowing in, retail participation should also be on the upswing in a bid to make the most of it? But should they be chasing 'value' or 'quality'?
They write, "Whilst ‘value’ delivers over shorter time frames (a year or less), the value premium dissipates over longer time frames, say 10 years. This is because whilst valuations dominate short-term performance, earnings growth dominates over longer time frames. Earnings growth, in turn, is the weakest for the cheapest stocks."
The two say that valuations play an important role in getting returns on your investments but that is only over a short period of time. Over the long term, it is the fundamentals of the company that drive value creation.
In this context, value is defined as the stock with cheap valuations and quality as a stock with strong fundamentals.
Stocks with rich valuations have gone to deliver a compounded annual growth rate (CAGR) of 10% over the last 15 years and the cheapest stocks have delivered a CAGR of 22% in the same time, Ambit Capital's research data shows.
"It is evident that over shorter time frames, a ‘value-oriented’ strategy seems to have worked well historically," they further add.
But over a short period of time, the stocks with rich valuations tend to do better which the others have seen elongated periods of stagnation and cyclical characteristics.
"Stocks may become expensive for several reasons like investors betting on a revival in the economy in general or a turnaround for a company in particular. Similarly good-quality companies may go out of favour due to near-term concerns and may become cheap. Therefore, quality and value should not be seen as mutually exclusive groups," the duo write.
To prove their point, Mehta and Khanna explain that Lupin's share price delivered a CAGR of 33% over the past 11 years but stagnated from January 2004 to March 2008 and from June 2010 to January 2012.
They conclude, "At its simplest, this is why the concept of investing for longer time horizons works – once you have identified a great franchise and you have the ability to hold on it for a long period time, there is no point trying to be too precise about timing your entry or your exit. As soon as we try to time that entry/exit, we run the risk of “noise” rather than fundamentals driving our investment decisions."
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