Markets have bottomed out

My first wish has been granted:

Dateline: 26th March 2008: BSE Sensex vaults 928 points for its 2nd highest ever gain. The pessimism seems to be gradually fading and confidence among investors seems to be returning. The past week has seen sensex gain over 9% and Nifty over 8%. Midcaps and smallcap indeces have also kept pace with the big brothers. The sensex has made a bottom in the 14700-15000 range and the Nifty in the 4450-4500 range. Value buying has clearly emerged in beaten down stocks. FIIs have been net buyers throughout the week. Mutual Funds have also started to buy aggressively. The advance decline ratios are heartening, and there has been a broad based buying in last week rallies.

However, some concerns remain on domestic growth figures. Even in a global slowdown scenario, Indian Economy should be able to post around 8% growth in GDP for FY'09. Inflation has reached a 52 week high at 6.68% for week ended 15th March, leaving the Govt. in a spot of bother. The inflation figures were out on Friday morning, but the strong sentiment in the markets tended to overlook the inflation data, and the markets gained more than 2%, the gain in midcaps and smallcaps was higher. This is how sentiments drive the markets. Let us compare global inflation data. Current inflation data of a few economies are (previous year figures are given in brackets): India 6.68 (6.56), USA 4.00 (2.40), China 8.70 (2.70), Russia 12.70 (7.60), EU 3.30 (1.80). The high inflation is a global phenomenon and is a result of the runaway commodity and food prices. Indian inflation data is following the global trends. According to anaylists commodity cycle may have reached its peak, and will start declining soon. But the shortage of food articles will tend to keep the prices of foodgrains high. It will be in India's interest to give utmost importance to 'Food Security', if we have to keep our growth story intact. In India inflation is more of a political issue than an economic issue, so invariably we tend to overlook the ground realities while assessing a sensitive issue like inflation.

The markets will continue to move in tandem with the global markets for most of the next week. The week thereafter, focus will shift on 4th quarter results of our companies which should give a positive fillip to the markets. Any dip in the markets during the week should be seen as a buying opportunity for long term investors. The inflation figures will be watched with anxiety, so will be the IIP numbers for February. There could be a positive surprize in store!

As far as the trend reversal that has started from around 14800 levels on the sensex, it has a potential for retracement of upto 50%/61%/75% of the decline from the peak level of 21200 reached on 8th January 08. These levels on the sensex are 18000/ 18700/ 19600 respectively. The sensex has a potential to touch these levels in the next 2 months. Till then investors may hold on to their stocks firmly. Profit booking, if any, may be taken up at these levels. However, we need to have a closer look at inflation figures, because RBI's policy on interest rates will be guided by these figures.

Markets this week: Fundamentals vs Technicals

The battle between bulls and bears seems to be entering a decisive stage this week. According to 'Fundamental' stock market theory, our stocks are at reasonable valuations and cherry picking can be done in fundamentally sound stocks with a long term perspective. However, based on the 'Technical' analysis there is still a downside to the markets. How much is the downside, its a house divided. The news from the inflation front accross the globe is not positive. India's WPI infation index has reached close to 6% (5.92%) for the week ended 8th March '08. American markets have reacted positively to the 0.75% rate cut announced by the Federal Reserve last week. Liquidity position of Indian markets is good, Mutual Funds are sitting on cash worth Rs.15000 crores. LIC and other institutions have also mopped up huge funds. All this is waiting to be invested in the stock markets.

This week could seee a decisive trend in Indian markets. Close to the March series expiry (F&O segment) on Thursday 27th March, the market is likely to create a panic bottom and thereafter should give a decent recovery. The market could recover anywhwere between 61% to 75% of its fall from the peak level touched in January. For example, if the BSE sensex falls to 14000 (a fall of 7200 points from its peak of 21,200) it could bounce back to 18300 or above within the next 2-3 months.

The market at these levels offers an excellent long term investment opportunity. The month of April will be excellent for the markets, given the anticipation of good earning numbers by Indian Corporates.

A Holi wish: Market turnaround round the corner

We Indians do or rather overdo everything in style. When our cricket team suffers a loss in a series we burn the houses of our cricket stars, and when they win we catapult them to the status of demi gods. The same is true for stock markets. When the market was trading at plus 20000 levels (BSE Sensex), everybody was convinced that the market was heading towards 25000 levels. Today when the market has been trading at 15000 levels, there is a talk of market going to sub 10000 levels. This sudden change of sentiment is uncalled for. But thats the way we are - 'Ham to aise hain bhaiyya'.

Over the past couple of days, I have been seeing a lot of negative vibes coming from the retail investors:
Somebody has already booked huge loosses. Those who are still sitting on profits are worried about the notional loss in their portfolio. Some even go to the extent of saying that they will never return to the stock market. The pain of loss is driving them to the other extreme - their is a clear sense of fear in everybody's mind. Our media is also responsible for spreading the negative vibes among investors, by operplaying the negative news.

So on the occassion of Holi, I have decided to put my 'Positive thinking Cap' on and do some Pep talk to lift the spirits of Investors. and this is what I visualise for the future:

Dateline: XX March 2008.

" Markets rebound from the days low of 14100 on the sensex, for the highest daily gain on the sensex"
The mood will change for the better after this headline. Then there is a spate of good news from the globe, to lift the spirits of the market participants. (It is buying time on markets!)

• Fed rate cut boosts the sentiment
• Liquidity crisis comes to an end
• MSCI index revamp: India gets a lions share
• Crude Oil softens: trades at $90 per barrrel
• US $ finds its feet: worst is over for Financial markets.
• FII's turn huge net buyers on Indian bourses
• India reports strong IIP numbers for February 08: growth at 8.5%
• Moody's upgrades India's rating
• Inflation falls below the 5% mark
• Agricultural output exceeds expectations.
• RbI relents on hawkish stance: pumps liquidity, CRR reduced.
• Govt to last full term; left renews support

All the above news flow is responsible for the change in sentiment. There is a change in market perception within 4-6 weeks.

Dateline: XX May 2008.

" BSE Sensex crosses 18500 level: Bull run is on". (It is time to book partial profits!).

This is a colourful Holi wish, painted with the vibrant colours of a growing Indian Economy. I firmly believe it can happen. But I will keep my fingers crossed. Wishing all of you a 'Colourful Holi'.

Looking beyond the statistics

The spate of statistical/ economic data over the past week has sent shivers down the spine of market participants. The analysis of this data suggests an economic slowdown. The IIP (Index of Industrial Production) figures for January '08 show a deceleration in growth rate to 5.3%, from 7.7% in December '07. Inflation index has grown at 5.11% for week ended 1st march, remaining above the 5% mark for 2nd week running. The news from International markets is also not very encouraging. Crude oil is trading at a historic high of $110 per barrel, Goldman Sachs has predicted Crude oil touchibg a peek of $175 per barrel. Consistent bad news on subprime losses for US firms continues unabated, latest casuality being Bear Stearns.

In the light of the above negative factors, a debate is raging in the media about the 'Reasonable valuation of Indian stock markets and the Sensex/Nifty'. Consider the following statistics:

• BSE Sensex PE multiple as on 14th March 08 stands at 19.44, as compared to PE of 15.03 for Dow Jones and a PE of 13.63 for Nikkei of Japan.
• Considering an estimated Sensex EPS of 1000 for March '09 (based on a conservative growth of 15% YOY), the current level of sensex translates into a one year forward PE of about 15.
• The sensex PE has fallen from the level of 28.5 reached in January '08, a fall of about 30%.
• PE multiple of BSE Midcap index is currently 16 (a fall of over 45% from its peak), and the PE of BSE Smallcap index is currently 12.7 (a fall of close to 60% from its peak).
• The closing level of sensex on 14th march '08, still gives a yearly return of 26%.

What, then is the intrinsic worth of the stocks trading on our markets? Looking beyond the statistics we find that sensex is not the barometer of broader markets. The valuations of broader markets are quite low as compared to the sensex. There are distortions within the sensex stocks as well. As of 14th March '08 20 of the sensex stocks are trading at a discount to their August '07 prices, and only 10 stocks are in the positive territory. The stocks with high PE multiples are L&T (42), BHEL (31), HDFC (30), and low PE stocks are Tata Steel (10), Hindalco (8). But mere comparison of PE ratios will not suffice. Individual stocks are discounted on the basis of their future growth prospects. This explains the distortion between their respective PE ratios. By the same analysis, comparison of absolute PE ratios of the Sensex with Dow jones or Nikkei has no meaning because the growth expectations of Sensex stocks is between 15-18% YOY against a growth of under 3-5% for other indeces.

Our markets have no major triggers for the next 15 days or so. Therefore, we shall continue to follow cues from the global markets. From 10th April onwards, the 4th quarter/annual results of companies will be declared, which will decide the future course of individual stocks and the markets. That would be an opportune time to shuffle your portfolio by getting rid of laggards and getting into good long term growth stocks.

The markets seem to be trading in a range of 15000- 19000 over the next 4-6 months. The chances of a closing below 15000 on the sensex and 4500 on the nifty is very low (although it may go down further intraday). The consolidation near the lower end of the range for a couple of weeks will be good for the markets in the long run. Patience is the key for investors.

Patience is the key for Long term Investors

According to Warren Buffet "You only learn who has been swimming naked when the tide goes out". For almost two years people have been making money on the Indian stock markets, irrespective of the fundamentals of individual stocks. So it is difficult for most of us to accept the current downturn in the markets which has eroded our investments significantly. Human behaviour is hardly rational, so the markets extended the excesses on the upside a few months ago, and now they are showing excesses on the downside as well. Even good news is seen as bad to push the markets down further. A reasonably OK budget has been given a thumbs down by the markets just because of one or two negative features. But this is again going to be shortlived, and the markets would ultimately reward 'value investors' in the long run.

Broadly speaking, there our two types of players in the markets: 'Value investors' and 'Momentum players'. If you consider yourself as a momentum player, you would have made a lot of money by investing in momentum stocks like IFCI, RPL, REL, GMR Infra and a whole lot of Realty stocks. These stocks gained anywhere between 50-300% within a short span of six months upto 8th January 2008. The fall in their prices since the peak has also been equally strong. If you consider yourself as a value investor and have invested in bluechip stocks like Tata Steel, ITC or some fundamentally strong Pharma stocks with a long term perspective, you should not mind an erosion in your portfolio to the extent of 10-20%, in this fall. A value investor should not be perturbed with these temporary swings in the market, because his long term portfolio is sound.

However, the problem gets aggrevated when a 'Value investor', who has bought stocks with a long term perspective, starts behaving like a 'Momentum player'. There is every likelihood that he will end up losing money both in a rising market as well as a falling market. He would then tend to buy on a rise and sell on a fall. Remenber, the gains and losses in the portfolio on a day to day basis are only notional, unless they are booked. Long term investors should be guided by the principals of Benjamin Graham and Warren Buffet, and stay invested for long term. The fall in markets can be used to build a sound long term portfolio, by investing in 'Value Stocks' with high earning visibility in the long term. The long term growth story of Indian Economy is intact.

BUDGET 2008:PC's Black Magic leaves markets confused

As expected 'Budget 2008' has kicked off the Election campaign of the UPA Govt. It is a politically correct budget, but is it economically correct too? Let's examine.

• The Budget has addressed the most immediate need to boost consumption demand in a gradually slowing economy. The Corporate sector may be disappointed at not getting any direct tax relief, but it needs to greet the huge bonanza in the hands of the individual tax payers to stimulate consumption demand, which augers well for corporate India. Excise duty cuts also will help boost demand in sectors directly impacted by the slowdown, viz. Consumer durables, Automobiles.


• The direct tax collections have exceeded the indirect tax collections for the first time in the country. The FM has expressed his gratitude by sharing a part of the tax buoyancy with the middle class individual tax payers. A part of this will go towards saving and part of it will go towards boosting consumption. In both cases it is going to benefit corporate India, directly or indirectly.


• Eduacation and Health sectors have been the major beneficiaries of increased outlays. This augers well for the future of the economy. The launch of the 'Skill Development Programme' on the Public Private Partnership model is a step in the right direction. The govt. has provided Rs.1000 cr. as initial investment for this programme.


• The budget has been more or less market neutral but for two announcements: Hike in short term capital gains tax from 10% to 15%, and the treatment of STT for brokerages. Both these steps have not been taken kindly by the market players leading to the negative market sentiment, post budget. These measures would lead to fall in volumes in the near term. But in the longer run the markets will take the measures in its stride. Infact the hike in short term capgains would result in more people holding the stocks for longer periods, reducing the volatility in the markets. So this step need not bother the long term investors.
• The announcement of the 'Farm loan waiver scheme' has evoked a lot of interest in this years budget. Infact this announcement as a part of the budget sounds inappropriate as no budgetary provision has been made for the scheme. It does make sense to provide relief to the distessed farmers, but could have been handled in a better manner. There is no dispute on the quantum of relief, but the broader ramifications of the scheme for the future of 'sound lending principles'. All said and done, it will have a mixed effect on the balance sheets of PSU banks. On the one hand they will be able to write off their NPA's, and on the other hand will get liquidity in the long run. The details of the scheme will be awaited by the banks with cautious optimism.

What lies ahead for the markets?

It is now being accepted by a majority of analysts that global slowdown is a reality, and India has not decoupled fully from the global markets. The FM has also hinted on economic slowdown in India. The steps taken in the budget will help overcome the slowdown with a time lag of 4-6 months. Till then our markets will follow the global market trends. Elections are very likely to be held in the last quarter of this year, after the monsoons are over.

In the above circumstances, market moving towards the January highs seems remote, given the ensuing political uncertainty. But the chances of economic growth being sustained by the Indian economy remain intact. The bull run is likely to remain in abeyance till the end of calender year 2008. Still the recovery that has started from the lows of 15332 on the sensex in January 2008 may continue for a while, after the budget is fully digested by the markets. Levels of 18700-19200 on the sensex may be used for some profit booking, before the onset on election season in India.