16th December,

This is one piece of sound advise for stock market investors. I am certain that those who pay heed to the words of this write up will be winners all the way.  This article is a must read for all those who are interested in investing in the Indian stock market.

Fundamentally, successful equity investors invest like business partners considering liquidation only in case of unforeseen and exceptional circumstances. Practically speaking small investors are comfortable with fixed time horizons, typically 3-5 years even under current circumstances where long-term return expectations for Indian equities would be around 18-20% p.a.

My logic for this return target for equities is as follows. Indian economy over medium to long term will register growth of 7-8% p.a. in real terms, i. e. the nominal growth rate (assuming inflation at 5-6%) will be around 14-15% p.a.

Most of the listed companies are in manufacturing and service sectors and these sectors will grow at a pace faster than GDP which will offset slower growth in agriculture. Therefore, these sectors will grow anywhere around 18-20% and if you invest in blue chips in these sectors, similar returns be expected over the long term.

Some skeptics will argue growth rate would fall due to contagion effect of global slowdown, tight money, lower capital inflow etc. They may be right in the short term, may be 1 year, at worst 2 years. Optimists like me, see revival in next 2 quarters.

Even if growth is lower next year by 1 or 2%, India will still be a relatively better investment destination. The lower rate would be an aberration and 8%+ will resume soon. India's growth is underpinned by a huge domestic market and demographics which favor significant increase in working population, whose contribution will drive proportional rise in national income.

This growth will happen despite political and policy environment which has not been very favorable. Thirty years back, agriculture was the dominant contributor to GDP and agricultural growth couldn't have averaged more than 2.5-3%p.a. over any long time period, land being a limiting factor. Now, Services account for more than 60% of our GDP and can sustain 10% p.a. growth in a normal environment.

Stock market opinions oscillate from extreme optimism to extreme pessimism. We saw heightened optimism in early January 2008 and abysmal confidence and pessimistic environment in October 2008. At 20,000 index levels people were expected further boom and leveraged and succumbed to greed losing not only profits attained over 5 years but also capital invested. In hindsight, it was obviously a mistake and a similar one will be made if we are overly pessimistic now.

Stock Markets have corrected over 50% and this is a good time to invest, wherein return expectations can also be higher say 25% over next 5 years. One should however have the stomach to live with the volatility as the market can also see a further dip of 10-20% hereon. Investors can invest surplus money now and await returns. If one waits for further corrections from here, opportunities to be able to invest at current and extremely attractive valuations can be lost.
 
Notwithstanding all global negative factors and their impact on India, I strongly believe that the market is near bottom for the following reasons.
 
* Crude oil prices have softened which is the single most important factor for India. Infact India is such a large economy that even if you cordon it off from rest of the world it can survive and grow except for its dependence on imported crude.
* Large pension funds and investors will find that India will prove a much better destination as the growth that India can offer will not be matched by any other country (I would say not even China) in the near future.
* Easing of monetary conditions and imminent interest rate cut, will slowly but surely bring back confidence and investment momentum.
 
Nobody could see anything negative except crude at 21k. Nobody can see anything positive except crude at 9k.

 Nobody wanted to dilute equity at 21k; nobody wants to buy equity at 9k.

 Everybody wanted to borrow then, everybody wants to hoard cash now.