(Photo: AP)
(Photo: AP)

Opinion | Battered stock markets have bargains to offer

The Covid-19 crisis has knocked equity indices hard and there seems no end to how much further they will fall. Expect further declines. And also opportunities for value investors

As Indian equity markets undergo one of their most devastating falls in a decade, the question on every stock investor’s mind is how much further indices will slide. The global Covid-19 crisis has battered assets across the world, except the very few seen as safe havens. The S&P BSE Sensex has lost a quarter of its value in less than a month, pushing the market into a bear grip of a kind unseen since the onset of the West’s Great Recession of 2008-09. Like then, huge sums of foreign money have fled back to shores considered relatively safe, and trillions of rupees of investor wealth has been wiped out. On Monday alone, when the BSE’s marquee index fell about 8%, investors lost a combined 7.5 trillion in market capitalization, the ticker-tape value of all their shares added up. On Tuesday, that index slipped another 2.6%. Red figures have been crawling across screens for session after session of trading, and yet, there is almost no sign that the worst of it is over. This is because there is still no clarity over how badly the coronavirus outbreak will disrupt economic activity, and how damaging the second-order effects will be of demand and supply contracting in tandem. On current data, the pandemic’s peak is hard to predict, so how long the health emergency will last is also a wild guess, at best. Sharp monetary easing by central banks, such as the US Federal Reserve’s policy rate reduction to near-zero, appears to have shaken rather than stirred market players out of their gloom. Such moves have been read as dire signals of an impending recession.

The crash, however, has made stock valuations look attractive after a long while. Consider the price-earnings (PE) ratio of the Sensex, which reflects the money an investor must pay for every rupee of earnings off its 30 constituent shares. After hitting a peak of over 29 in the second half of December, this metric declined to under 20 last week. The PE ratios of individual shares differ vastly, of course, but many of them could attract value investors on the lookout for good picks available cheap. Also, a chunk of foreign institutional capital is already reckoned to have left. By market data, on a net basis, foreign funds sold Indian equities worth a massive 31,517 crore in March, after having bought 1,820 crore worth of shares in February and 12,123 crore in January. More foreign money might exit, and is likely to, but the impact on prices might be less severe if a bulk of the rest stays invested and domestic investors acquire the nerve to start buying.

There may be volatility ahead, but this need not bother those who want to pick up shares for their original purpose—to get a slice of the money that well-performing companies make. While PE ratios have fallen, dividend yields have risen. At lower purchase prices, investors get a higher payback every year by way of profit distribution as a percentage of what they pay for these shares. If they focus on dividends, instead of the market value of a portfolio, they may get a chance to look back after many years and congratulate themselves for some bargain buys. It would help if Indian companies did more to attract such buyers. The best way for them to do that would be to retain less of what they make every year, and distribute a larger portion of it.

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