If I knew with confidence we would have a decisive government, India would be at the top" . These are the words of Mr. Jim O'Neill, the former chairman of Goldman Sachs who coined the famous BRICs (Brazil Russia, India, and China) acronym. He is of the view that it is better for one to take a wait and watch approach - until the election results come out - before buying into India.
In an interview with Mint, Mr. O'Neill mentioned that China, Mexico and Nigeria are his current top picks amongst emerging markets.
The rationale behind choosing India his top emerging market pick are those similar to the traits of the country's long term consumption story. These include favourable demographics, rapid urbanisation, and strong growth opportunities.
It would not be wrong in saying that the broader view that Mr. O'Neill shares pretty much reflects the sentiments of all long term foreign investors - who have been quite bullish on Indian stocks in recent times. While they have been praising the country's central bank, their views on the current government are quite the opposite. Essentially what the country requires is positive change, something which an effective government would bring in.
Mr. O'Neill also discussed his views on India being included in the list of Fragile Five, a term coined by Morgan Stanley. Countries that form part of this group - India, Indonesia, Brazil, Turkey and South Africa - have been included because of their vulnerability to volatile capital flows. Nevertheless, Mr. O'Neill believes that the worst for India is over. He however does believe that there is no escaping the US dollar dependent market in the short to medium term, which is why the US government's monetary policies will continue to keep the markets volatile; and that for countries to safeguard themselves from this vulnerability, the focus should be on increasing foreign direct investments.
All said and done, this is just one of the many views making rounds.
Essentially, there is a lot of uncertainty around. And with investing veterans providing views that are quite varied in terms of their outlooks - with some predicting the scenario to get worse than what it was a few years ago - how things will actually turnout is anyone's guess.
One thing is sure. All of this has led retail investors in India to simply stay away from investing in stocks; with them pulling out because of having their fingers burnt or just simply booking profits, making up for past losses. Relatively safer instruments are being preferred now. With yields of such instruments being at high single to low double digits, the demand for fixed deposits and bonds has increased substantially.
But as we all know, over the long term such instruments do not have tendencies to beat inflation levels as one's purchasing power gets eroded over time. So it would be a matter of time before people start moving back to stocks. And this seems almost certain given that the current retail participation levels are at their lowest in many years.
Retail investors (in general) have the tendency to enter markets when stocks are not very cheap. Only after having seen the performance of the markets is when they consider parking money into stocks. Morgan Stanley in its retail survey last year learned that retail investors tend to look at the short term performance of the market to base their decisions on whether to invest in stocks. The period gauged by them is usually one year.
The outcome of the general elections is being keenly awaited. As such, people have taken a wait and watch approach. Stocks of quality largecaps are seemingly expensive at the moment. Whether their valuations will remain at similar levels post the elections cannot be commented on. We urge investors not to blindly enter markets and believe they would do well by keeping a close watch on good companies at attractive valuations. Buying into stocks at higher valuations (even in the cases of good quality companies) has not always been a market beating strategy, which is why retail investors have had bad experiences with stocks in the past.
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