India has always been a growth market, meaning investors chase growth in this part of the world, offering the country a premium valuation over its peers globally. But ignoring ‘value’ in this market could be foolhardy. It is especially true, when valuations are polarised and that earnings growth may do little to rerate ‘popular’ stocks anymore amid questions of margin of safety.
In value investor Benjamin Graham’s words, the market is a voting machine in the short run but a weighing machine in the long run. A focus on investing in sectors which are out of favour but offer long term value, many a time, proves to be rewarding. Here investment is made in a stock, which is trading below what an investor considers is the intrinsic value of the business, after considering margin of safety, to eliminate calculation inadequacies.
Value investors believe that the market movements are emotionally triggered and may not always offer a fair view of the company’s performance in the short term. One can draw numerous examples of success of value investing in India in the past. One such example is 1999, when there was value in old economy stocks. Another such example is 2007, when there were pockets in technology, pharmaceuticals and FMCG sectors, which were undervalued and out of favour with investors.
Among the two instances, investments made in old economy stocks in 1999 did very well because the market, at that point in time, was solely focused on technology stocks and was largely ignoring value in other spaces. Similarly, the infrastructure sector hogged limelight in 2007, but other sectors were not valued appropriately or were undervalued.
Graham once said that the intelligent investor is a realist who sells to optimists and buys from pessimists. Thus, value investing involves buying an unpopular stock, against the market view, and selling at a time when it is widely popular among investors, again, against the market view.
At present, the Indian benchmark indices are trading not very far from their all-time high levels. There are fears of inflationary pressure globally, higher-than-expected Fed rate hikes, geopolitical tensions and rising Covid cases in China, causing a fall in growth stocks globally. This had led smart investors to look for pockets which are currently available at a good value.
While at it, what is important is to know the other side of the trade i.e. why is the other side selling, and make a proper risk assessment and the intrinsic value. S/he also must possess the expertise to understand the market cycle and triggers. If an investor is finding it difficult to do the risk assessment on his own, he may probably consider value-oriented mutual fund schemes.
Such mutual fund schemes invest in stocks that are available at prices that are attractive relative to their historic prices, the company’s earnings and performance. Investors investing in these schemes, however, need to keep their investing time horizon long enough to reap rewards as the market could take some time to discover the potential value in the stock or sector.
Within the mutual fund universe in India, value was a sizeable category. However, in the pre-pandemic phase when growth was performing well, many investors lost patience with value oriented schemes and cashed out. However, in the second half of 2020 onwards, value made a strong comeback. This was largely owing to the fact that while investors piled on the new-age sectors, the old economy stocks were left out and were available at attractive valuation which once garnered investor attention. Investors who had stayed put in value scheme as a result reaped rich gains. As an investor it is important to recognise that no matter how expensive the market may be, there will always be pockets of opportunities across sectors. Hence, investors with long term horizon can consider investing in value funds for meeting their long term financial objectives. With the economy gaining momentum, it is widely expected that value funds are set for a strong comeback as the economy revives.