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2012 may be the year of consolidation, providing long-term investors an opportunity to enter the stock market
Gaining in the equity market to a great extent depends on the time of entry. For example investors who would have invested in 1996, 2003 and 2009 would have made huge returns on their investments over the next few years, while the ones who would have invested in 2007 or 2011 would have mostly lost their money.
That is why as an investor one always wants to know when to enter the market.
The benchmark Sensex has fallen 24% since its last high in November 2010. From the peak valuation of 24.1, the price-to-earnings multiple of Sensex has come down to 16.7 at present. This is lower than the 13-year average of 18.5.
Based on this one still can't conclude if the markets have bottomed out or have further scope to fall in the year ahead since at the last bottom the Sensex valuation had dipped to 10.4 and 11.6 levels.
One thing is sure that the market is most likely to find its bottom sometime in 2012, which will offer a lucrative entry point to investors. However, no one really knows when or at what level. As they say, it is almost impossible to catch the lowest point and any one waiting to invest at the bottom-most point is most likely to miss it. Hence, as a prudent investment strategy, one can consider investing in staggered manner in 2012, as waiting for the bottom may not be possible. Here are certain factors which favour this argument.
Market Cycle & Valuation
The stock market data since 1990 suggest that the Indian market typically follows a four-year cycle. Four years of bull phases is followed by four years of consolidation. After the crash in 1992, the market took around 4 years to consolidate, before it started to move in the upward direction in 1996. Within next four years, by 2000, the Sensex had doubled.
In 2000, the market suffered another crash, commonly known as the dotcom bubble burst. Post this, the market consolidated for four years, from 2000-2004, when the next bull phase took off. The Sensex more than quadrupled in the next four years to touch 21000 level in January 2008. Stagnation followed thereafter followed by the crash below 8500, which gave an excellent opportunity for long-term investors.
The four years of consolidation will complete in 2012. The question now arises, is 2012 a good year for retail investors who are planning to invest with a time horizon of three to five years. Over the past 25 years, the market has given returns at an average CAGR of 14%.
The valuation at which the Sensex is trading right now is not very expensive. It is trading at a price to earning multiple of 16.7, which is quite cheap. For the past 13 years, the historical average price to earning multiple has been 18.5 and the Sensex has traded at the highest price to earning multiple of 29. And 2012, there are high chances of market reaching the bottom, before it enters another bull phase.
Hence, it is a classic opportunity for investors, who are looking at investing for a horizon of three to five years, to enter the stock market.
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