High time investors look at value investing

by the same. This is simply because FPIs own a big chunk of the Indian market and they are very active players and so, many Indian investors follow their lead.

Every investment theory works well part of the time and it is less successful at other times. Both, growth investing methods and value investing methods can be highly successful. There are times when single-business firms do well and there are times when conglomerates do better. It depends on the prevailing phases of the business cycle. Growth stocks can trend up to unrealistic levels until the growth tapers off at some stage.

Value investors suffer in comparison during periods when growth stocks receive very high valuations. But, value investors gain in bear markets or during periods of disruption. That's when they can pick up stocks cheap.

Single business stocks always experience some cyclicality. There will be periods of high growth, and periods of slow growth or recession. Conglomerates hold the advantage in those terms. A conglomerate can tend to have one business or another that's always chugging along profitably. On the other hand, conglomerates will usually hold one or more businesses, which are performing poorly because of cyclical reasons. That can drag them down in comparison to single-businesses when the single business is at its peak. Plus it is harder to make a clear judgment about conglomerate financials, which usually means less optimistic valuations.

Right now, the FPIs seem to be buying a wide selection of stocks, - anything that fulfils basic size requirements because it doesn't make sense for them to invest in very small stocks. The FPIs have logged ~28,068 crore worth of net equity buying so far in the JanuaryMarch 2017 quarter. They have also bought ~10,183 crore of net rupee debt.

This buying coupled to domestic enthusiasm has put the market into a phase where overvaluation is visible across most sectors. The major market index, the Nifty, is trading at a price-to-earnings (PE) of about 23.8. That is well above its 12-year median, PE 20.1 and its average, PE 19.7. (The median being higher than the mean indicates many low PE values in this case).

The Nifty trades above PE 24 very rarely. Since 2005, it has traded to above PE 24 only about 4.5 per cent of the time. However, peak Nifty valuations have edged all the way to PE 28 so there is still arguably an upside even at current levels. Optimists will point to the fact that EPS growth has picked up in the past three quarters. If EPS growth is maintained, prices could rise further while valuations stay stable.

Although there could be an upside, valuations always revert to mean/median range eventually. This is a real danger in an overheated market. Investor should seek a margin of safety by finding stocks that are relatively less highly valued. Switching to value investing approach is a good defence against a crash. However, many investors will continue to play follow-the-leader and invest wherever the FPIs are going. That model will yield painful losses, as and when the FPIs decide to book profits. Mexico is the most attractive emerging market for investors, based on a range of metrics analyzed by Bloomberg including growth, yields and equity valuations. India is the worst.

Mexico saw its currency slide and bond yields surge as President Donald Trump was elected in November after lambasting the country for stealing US jobs. Even after an initial sell-off subsided, 10-year bond yield is still more than a percentage point above where it was before the election. The peso's real-effective exchange rate is close to a 21-year low, boosting the earnings outlook for exporters.

“Both Mexico’s currency and bonds have been sold too much,” said Akira Takei, who helps oversee the equivalent of $440 billion as a fund manager at Asset Management One Co in Tokyo. He said expectations the dollar will weaken have convinced him to hold a higher proportion of pesos and Mexican government bonds in his portfolio than recommended by the benchmarks he follows.

Analysts have raised the fourth-quarter peso forecast by almost 5 per cent to 20.50 per dollar since February as Mexico's currency retraced some of the declines that started in November.

India is the least attractive developing nation for investors due to its relatively expensive stocks, bonds and currency. India's NSE Nifty 50 Index rose to a record and the Sensex climbed to a two-year high last week as the electoral victory of Prime Minister Narendra Modi's party in the nation's biggest state sparked optimism he will accelerate reforms including the introduction of a goods and services tax.

The new tax "is a great thing in the medium term, but there will be some disruption to consumption in the months following its introduction," said Vaninder Singh, an economist at NatWest Markets in Singapore.

Singh agrees India