Long term wealth creation can be achieved only during adverse times when stocks of blue chip companies are available at bargain prices. Any investor who can buy at such times and has the patience would emerge as a successful wealth creator
The volatility in the Indian stock markets continues. The Sensex which crossed the 30,000 mark in the last week of January saw a sharp fall and thereafter corrected by about 10%. This correction unnerved a lot of investors who began to fear that the market which turned bullish on the announcement of Narendra Modi as a prime Ministerial candidate may now be in a reversal mode. The fears appear unfounded as the Indian stock markets continue to remain in a bull phase and such corrections in a bull market are common.
No doubt the Modi magic to some extent is on the wane, but then expectations ran ahead of fundamentals. It is a fact that whatever measures that the government initiates in terms of kick-starting the economy there is always a lag effect. On its part, the government has initiated various reforms like the mining, coal, insurance bill etc. At the same time, other initiatives like the GST, Land acquisition bill etc is being stalled by the opposition.
In recent times, market sentiment has been negatively impacted by the stance of the RBI governor who appears to be extremely conservative where rate cuts are concerned. Adding to the woes was the prediction of a less than normal monsoon by the IMD. The possibility of a hike in interest rates by the Fed in September and the Greek crisis were other factors that dampened market sentiment.
On individual stocks too, there were issues that resulted in these stocks seeing a massive drop in their stock prices. On the Maggi controversy the shares of Nestle dropped from a high of Rs 7500 to Rs 5800, while the ban on loose cigarettes in the state of Maharashtra saw a sharp fall in the stock price of ITC from a high of around Rs 415, a day before the announcement of the union budget to less than Rs 300 recently.
From an investors point of view declines in the market as a whole or in specific blue chip stocks due to issues which are temporary in nature and can be corrected by managements over a longer period of time are excellent investment opportunities.
In the case of Nestle no doubt the stock was quoting at rich valuations, but the sharp corrections and the possibility of further declines due to a negative sentiment prevailing is an opportunity for long-term investors to acquire the stock on a gradual basis for decent long term returns.
Similar is the case with ITC. It is a fact that the company’s bread and butter business in the form of tobacco may not be the best of business in the years ahead as tobacco is viewed to be injurious to health and the world over the campaign is to avoid tobacco, but at the same time the company is a well diversified company with a good management team and is aggressive in pushing ahead the diversified business especially in the FMCG segment, which over the years is expected to emerge as its mainstay business of the company. In both these companies, the downside risk appears to be limited with great upside potential over the longer term. It is a known fact that wealth is created when there is pessimism, whereby an investor can acquire a great company at a relatively cheap price.
The recent decline in the stock markets is also an opportunity to purchase the shares of blue chip companies at lower prices. In the automobile industry, the stock price of Tata Motors has witnessed a steep decline from a high of around Rs 615 to the current price of Rs 430. The stock at the current price is less than the price of Rs 450, the price at which the rights were issued. The company’s performance has not been up to the mark, but going forward with the uptick in the economy and the new launches in the pipeline the stock could see a sharp recovery going forward.
The stock prices of public sector banks have also been beaten out of shape and almost all of them are quoting at yearly lows. It is an accepted fact that in terms of efficiency and management bandwidth, the public sector banks cannot be compared with the private sector banks, but yet when it comes to pricing, the pubic sector banks are quoting at almost rock bottom prices.
Most of the public sector banks are faced with stressed assets as many sectors especially steel, infrastructure etc are in a downturn for a long period of time and also the several stalled projects has also added to the woes of the public sector banks. However with the efforts of the government to kick-start the economy as well as revive stalled projects, the outlook could reverse and the level of stressed assets should see a sharp fall.
It may not happen overnight, but over the next few quarters there could be a substantial improvement. In the light of a changing scenario one of the major beneficiaries could be State Bank of India which at the current price of Rs 260, which is inclusive of a dividend of Rs 3.50 could generate handsome returns to patient investors.
It should always be remembered that long term wealth creation can be achieved only during adverse times when stocks of blue chip companies are available at bargain prices. Any investor who can buy at such times and has the patience would emerge as a successful wealth creator.
(The Author is an investment expert and a Director at Altina Securities.)