ithought market wrap No.53 dated 26 Nov 2011

Quick edit:
Relative valuation is a great way to evaluate asset classes. To make the most out of money, it makes sense to buy what is relatively attractive. If we invest in an asset class which is relatively cheaper than others, we limit our downside and set ourselves for the upside whenever it happens. By that yardstick, it makes no sense to buy property now as prices hover very close to their all time peak. Yet, most investors are buying on the driving belief that one can never lose in property. There can be no greater folly than this as real estate follows long price cycles and mistiming causes great pain and financial costs. Gold is also being sold as a safe haven. ‘You can never lose’ is again the driving pitch. Relatively speaking, equity is definitely undervalued. The risks are priced in and any improvement in sentiment will be a huge positive. Significantly, investors are missing the inter-connect between these asset classes.

The markets haven’t capitulated under the rising momentum of FII selling though DII’s haven’t bought with matching aggression. The markets found support at 4700 levels. The market weakness is due to weak global cues and fund outflows. The rupee’s free fall only added to the troubles and investors simply did not open their purses to buy. There seems to be an air of confirmed confidence among investors of a breakdown and sensex numbers of 14000 and 12500 are freely bandied about. Everybody has this hard nosed conviction that their expectations will be met. If past market cycles are a lesson, it will be a miracle if the consensus view comes good. It is another thing that those waiting for their `level’ will again reset their levels when they seem too close to targets. Risk aversion is driving investor behavior. You don’t need to be an economic expert to know that great investing seldom takes place under the influence of extreme risk aversion. The consensus view is doomed to fail.

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