We are standing in the middle of 2016, and so far Nifty 500 had given a return of 3.50%. After looking at the market reaction to BREXIT and domestic clues many do expect stock market to outperform other asset classes in 2016. Let me throw this question to you, what returns do you forecast stock market will give to its investors in the 2016?

Well, I don’t have those special powers to predict the market in the short term, but with what information I do have today, the probability of market giving negative returns is little more than positive. Again, don’t forget we pretty much synthesize our view every week on market returns, so this view can change next week.

Looking from what stocks we own and what their expected values suggest, our portfolio is expecting another 5.86% returns this financial year. And if we look at our Portfolio 1, they are expecting a return of around 19% this financial year.

Talking about prices and value of the stocks, we strongly believe that price is not always equal to value. The best recent example we can share with you to prove will be the share price of Redrow Plc. trading on London stock exchange. The stock opened 77% lower on the BREXIT day in its first 15 minutes trade. Remember we shared about Indiabulls Housing Finance opened up at Rs 616 on that same day for two minutes. Redrow stock closed on that day down 19% and Indiabulls housing finance closed at around Rs 659 per share. We are pretty sure the value of Redrow did not fell 77% in those 15 minutes and Indiabulls housing finance around Rs 616 on that day.

The concept of price and value are separate, yet fundamentally linked. Price is readily observable and refers to the market price what investors are willing to pay. Value, on the other hand, is unobservable and based on analysis of the fundamental drivers of stock’s value over the long term such as free cash flow, return on equity, leverage and etcetera.

Over the medium to long term, stock prices should track changes in its fundamental drivers. As such, over a long period of horizon a business is unlikely to grow much faster than its rate of growth of its earnings and cash flow. Same time, in the short term, market noises can cloud investors from focusing on the fundamentals of a business.

Like with Indiabulls housing finance, its 2017 financial year value band is expected in range of Rs 670 – Rs 765 per share, and today it is trading in the lower band. When we cross check our analysis with others, we found that many other analysts are worried about its sourcing of funds at around 9% as expensive exercise and can impact its margins. On the other end we think that there is a greater chance of interest rates staying where they are or even to rise. Also the cheapest home loan you can get today is at around 10% and overall not all of its funding is sourced around 9%.

So, if market drops Indiabulls housing finance price below Rs 670 on its short term clouds of expensive fund source, we think it is a great buy today!

We always come out with the list of top 10 stocks every month that we think are the good quality businesses and are also expected to report strong earnings growth. Remember these kind of stocks are not always cheap but it is always good to keep your homework done and wait for the opportunities like BREXIT to come and take advantage of it.

jk bank logo Price is trading in the middle of 2017 expected IV band
kitex Price is trading above its 2017 expected IV band
mark logo Price is trading above its 2017 expected IV band
eicher Price is trading at upper band of 2017 expected IV band
alembic Price is trading in the middle of 2017 expected IV band
ipca logo Price is trading above its 2017 expected IV band
yes bank logo Price is trading above its 2017 expected IV band
ongc logo Price is trading above its 2017 expected IV band
eros Price is trading above its 2017 expected IV band
indiabulls Price is trading in lower band of its 2017 expected IV band


Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we advise you to take professional advice before going ahead with our views.