Big market crash: don’t panic, look for bargains
Stock prices are subjective. Company profits are objective. Between the two falls the light of wisdom for those trying to read the meaning of this week’s stock market crash. The message for most people: Don’t panic, look for bargains. For retail and small investors, the simple question is: If Mukesh Ambani is not worried about losing thousands of crores in personal wealth, should you, writes Narayanan Madhavan.Check out graphicsbusiness Updated: Sep 14, 2009 17:57 IST
Stock prices are subjective. Company profits are objective. Between the two falls the light of wisdom for those trying to read the meaning of this week’s stock market crash. The message for most people: Don’t panic, look for bargains.
For retail and small investors, the simple question is: If Mukesh Ambani is not worried about losing thousands of crores in personal wealth, should you?
The answer is ‘yes’, if you have borrowed money to invest in stocks, or sunk in hard-earned savings at high prices. It is ‘no’, if you are a long-term investor who has a prudent share of savings parked in stocks.
A lot of the mess in the global stock markets this week was triggered by cautious foreign funds pulling out money in the face of fears of a US recession. This is a bit like a driver braking or using the clutch repeatedly in a traffic jam. You can’t blame either the driver or the car for it.
With the US Fed cutting its benchmark rate by 0.75 percentage points in an emergency measure on Tuesday, a key aspect of uncertainty may be over for investors across the globe. US stocks are down, tracking losses in key banks that burnt their fingers in bad home loans.
Indian companies, however, are looking towards solid profit growth. In general, stocks are valued by analysts on the basis of their anticipated growth and sales and buttressed by prospects for the industrial sector or economy in question. On all these counts — collectively termed as fundamentals — India’s economy is going strong, and the GDP is expected to grow by 8.5 per cent in 2008/09.
At around Sensex levels of 17,000, a little above Tuesday's closing, the price-to-earnings ratio for its 30 companies as a whole is close to 16 times the 2008-09 earnings, considered prudent by global standards. On that logic, smart investors will tell the difference between what a stock is intrinsically worth, and the sale being effected for other reasons. True, India's corporate sector may be partially affected by US swings, but the two are not umbilically linked.
One look at the tycoons whose paper wealth has soared in the recent bull run would give a clearer picture. Promoters of companies with actively-traded shares collectively lost about Rs 7 lakh crore on Monday, with RIL chairman Mukesh Ambani alone losing about Rs 19,000 crore in notional wealth, when the stock fell by 9 per cent.
But tycoons like him carry on with a business-as-usual because what matters is their corporate performance. "Recently, there have been several reports in the media on my personal wealth. Frankly, I am amused by these reports,"Ambani said. "Because I have never thought of myself in these terms.I measure my success by the value that I create for my shareholders and the assets that we, as a company, create for the nation as a whole."
Whether it is a Narayana Murthy at Infosys, a Sunil Mittal at Bharti or an Ambani at Reliance, business is about generating profits at the ground level. Global inflows and outflows of capital cause their shares to go up in a futuristic view, but smart investors operate on the oft-proven faith that sooner or later a stock's price catches up with the value shown by its profit - and other fundamentals such as revenues, reserves, land or other assets including human resources.