Increase investments when prices drop substantially.

This year has been quite disastrous and the prognosis for 2012 doesn’t look great. Although 2008 saw a steeper fall in stockmarket prices, governments had resources for counter-cyclical action. Now, government finances are under strain everywhere.

There is no global engine of growth. Europe is busted, the US is busted, Japan is busted. India is financially stressed though not quite busted. China is in slowdown. To add to worries, there is continuing turmoil in the energy-exporter region of Arabia. That might keep crude and gas prices ruling higher on fears of supply disruption.

Things always get better eventually. But all the signs suggest that it will be a long haul. So 2012 could well be a second successive year of negative returns. India’s macro-economic indicators have deteriorated to the point where it will take two to three quarters before a significant turnaround.

Another problem for an analyst is the unreliability of macro-economic data. It has always been poor in India (and China). But global data, including First World data, is also dubious at the moment. So investors will just have to assume generous error margins and punt in hope.

Under the circumstances, I wish that the market had fallen quite a bit more! The current index valuations of PE 16-17 are near long-term average valuations and clearly, the situation is quite a bit worse than average.

If the stockmarket had corrected deeper, one could invest in equity with a two-three year time frame and some comfort. Since Indian bear markets usually bottom out at PE 12-13 or less, the current valuations are not comfortable.

As things stand, one would have to wait for one of two things to occur in terms of equity valuations. There may be a sharper downtrend in the next three to six months, driving index PEs down to 12-13. Or, the market will mark time for a much longer period, while earnings gradually rise.

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