A few years ago, Prashant Jain of HDFC Mutual Fund penned down his thoughts in an interesting note titled “It is always darkest before dawn”.
In that he presented an interesting table.
|
Sensex / (1 year Fwd PE) |
News |
Return after 3 years |
Return after 5 years |
| Sep 2001 |
2812 (11) |
Terrorist attacks on Twin Towers |
84% |
316% |
| Jun 2004 |
4795 (10) |
Defeat of BJP in General Elections |
203% |
212% |
| Jun 2006 |
9296 (13) |
Collapse of U.S. housing market |
61% |
99% |
| Nov 2008 |
9093 (11) |
Sub-prime crisis erupts as Lehman Brothers collapses |
100% |
128%*
|
| Aug 2011 |
16857 (13) |
U.S. downgrade, European crisis |
60%*
|
? |
Returns are absolute / * Nov 30, 2008 – Nov 30, 2013 (5 years) and Aug 31, 2011 – Aug 31, 2014 (3 years). Since Jain wrote this piece in August 2011, he did not fill in two gaps, which we have done in red.
Jain hoped that the above table would speak for itself: Good returns materialise over time on investments made at cheap valuations (meaning low PEs) and PEs are more likely to be low when the news flow is adverse. If growth persists and if PEs are low, then equity returns can’t be far, at least not too far.
In other words, to be a successful investor, focus more on value and less on news flow.
Jain gave an interesting tilt to the “bad news”, which has been reproduced below.
Scandals were already there, that was the bad news. Their coming in the open is good news. In a democracy with coalition governments, change is difficult. In such an environment, change takes place mostly in a crisis. Right from the opening up of the economy in 1992 driven by a balance of payments crisis, to improving the security set up after the terrorist attacks in Mumbai, to increasing diesel prices when the subsidy burden was unbearable, to the likely reforms in power distribution driven by mounting losses of distribution companies, all have been triggered by a crisis.
India is in transition – the coming to light of these scandals is welcome – it will lead to change for the better in the way India functions. Some of the welcome changes that are already underway are improving transparency in land acquisition, in allocation of natural resources through a bidding process, better targeting of subsidies though cash transfer to the needy etc.
A point worth noting here is that despite the impediments, delays, scandals and several rounds of changes in regulation, infrastructure is improving significantly. Apart from the telecom story which is a clear success, India has a rapidly rising number of privately owned world class airports & ports, fast improving inter-city roads, sharply reducing power deficits etc.
In my opinion, there are thus several reasons to be optimistic about the growth prospects and about improvement in governance and infrastructure in India.
And finally for the pessimist, if you don’t believe that markets will perform over a reasonable time and if indeed that turns out to be true, then, it is even better for your long term wealth provided you are a saver. This is so because, the longer the markets stay low, the more is the money that can be invested in equities and therefore higher will be the wealth whenever the markets finally move.
Next:
Prashant Jain on why investors lose money
