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Why You Should Not Take Experts View on Equity Seriously?

BY: Vivek SHARMA | Category: Finance | Submitted: 2012-01-26 04:23:50
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Article Summary: "Business News Channels in India show the views of the experts on specific new events which often prove out to be incorrect..."

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It is very common for business news channels to track corporate events in India. Whenevr results are to be announced by companies, news channels start evaluating performance of the companies in advance. Also post result, these channels evaluate the performance of the companies and ask experts to comment on the result. My experience shows that these experts are proven wrong almost every time, especially when economic conditions are adverse. Let us take an example and understand this.

When Larsen and Toubro came out with its result on 23-Jan-2012, the stock of the company did not react much. The stock which had opened at 1272.90 on BSE on 23-Jan-2012 closed at a price of 1277.70. The movement results came out, the stock market analysts were seen in action. Many of the analysts started evaluating the stock and came out with some funny remarks as usual. In an interview to CNBC TV 18, Lokesh Garg of Kotak Institutional Equities told that that they have revised their targets to Rs 1330 from Rs 1175. (Refer source below in resource box 1)

Another analyst equally ignorant as Lokesh Garg one step ahead and said that margins reported by L and T is a shocker. This great person is Shailesh Kanani, research analyst at Angel Broking. His analysis is even more horrible ( Refer source below 2 in Resource Box)

Now let us look at another event. The Reserve Bank of India(RBI) came out with its credit policy and cut the CRR rate by 50 basis point. Markets reacted positively to this move and the both Sensex and Nifty went up by around 1.5%. L and T stock also responded and crosses target set by Mr. Lokesh Garg in one day and the margin which was shocker went into oblivion. The stock price went up and it closed today at 1349.60 at BSE.

The events mentioned above raise an important question, what matters more for price of a stock. Are fundamentals of stock more important or macro economic factors having much more impact on stock prices? The slowdown that has engulfed global economy post 2008 has made this question more relevant. It has been seen time and again that markets are more sensitive to economic factors in India. Whenever government makes some policy announcements whether monetary or fiscal markets react more to that than stock specific news. A series of repo rate hike is an example of that. Forthcoming budget will also bring this aspect more forcefully. Hence it becomes important to incorporate macro economic factors in pricing the stocks than just looking at stock fundamentals.

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