One Year Period is too short to Evaluate Equity Portfolio

There has been a lot of turmoil in the equity markets around the world. October 2008 has been an extraordinary month for equity markets, with stock indeces sinking to their 3-5 year lows and the volatility index reaching alarming levels. But all said and done it is not fair to evaluate equity investments from a short term perspective. The longer your perspective the lesser the probability of your equity investments giving you a negative return.

The probability of loss in equity investments with a 1 year perspective is as high as 10/26 (ie. you are likely to witness an erosion in equity values in 10 out of 26 years. This probabilty keeps on reducing as your investment horizon increases: The probability of loss is 5/24 (3 years), 3/22 (5 years), 1/17 (10 years). That means that the chances of an investment giving negative returns is almost negligible in a 10 year period. And the average return given by BSE sensex over its history (1979 - till date) has been more than 17% per annum, doubling the value of your investment in slightly over 4 years. Is it possible to get these kind of returns from any other investment? Probably the answer will be no. The bad times in the equity markets will end over a period of time, investors have to be patient to reap the rewards from equity. But do keep booking profits from time to time to shore up your liquidity levels.

Samvat 2065: A Prognosis

The official Indian Calender goes by the Vikrami era: Currently we are in Samvat 2065 which kicked off on 7th April 2008. The Vikram era or Vikrami Samvat originated in 57 B.C. and the date marked the victory of King Vikramaditya over the Sakas who had invaded Ujjain. The official Indian Calender or the Vikrami Samvat is based on both the sun and the moon, it uses a solar year- divided into 12 lunar months . For stock market participants Diwali day marks the start of a new era, when they start their accounting year afresh. So it is customary to take stock of your investments from Diwali to Diwali every year.

Let us try to analyse what is in store for Indian stock markets for Samvat 2065. Since stock markets do not move according to individuals but according to the combined wisdom/acts of a large number of individuals, I am giving you a perspective on what different people feel about the markets in Samvat 2065, to enable you to understand and take informed decisions for the safety of your investment portfolio. I do not intend to give "My top picks", but to guide you to be able to pick your own Top picks.

Samvat 2065 is kicking off on Dalal Street on a positive note: I say a positive note because the worst is behind us, Sensex has made a new 3 year low of 7697 on 27th October 2008 (corresponding Nifty level is 2252). This gives us enough headroom for an upside till next Diwali. Let us consider 3 different views on the movement of the stock prices for the next one year:

• Technical view: As I am not a qualified technical analyst, the views expressed here are of technical analysts on various media channels. Technical analysis should always be taken with a pinch of salt because it takes a short term view on the markets. Most technical analysts are of the view that the worst is not over, the sensex can dip to levels of around 6000 (corresponding Nifty level is 1600) before making a rebound, a scary picture indeed! But since the markets are oversold a sharp recovery of 25-30% in the immediate future cannot be ruled out.
• Fundamental Analysis: This allows us to identify potential Blue chips based on certain parameters: 1. Earning Per Share(EPS) is the most important criteria to judge the intrinsic worth of a share. Growth companies show a consistent upward trend in their EPS. 2. The price that an investor is ready to pay for a share is the PE Multiple, which is measured as the current price of the share divided by its EPS. Since Debt or fixed income securities are giving a return of around 10% on your investment, a PE ratio should be higher than 10 for equities because of their high earning potential in the long run. The current PE of the sensex at 8500 levels is exactly 10 (on the basis of 2007-08 earnings). So fundamentally markets should not dip below these levels, but the markets do not always behave rationally. In January 2008 this ratio was as high as 28, however the average PE ratio of Indian markets has been in the range of 14-16. According to this analysis the fair value of sensex at the time of next Diwali should be between 13000-15000. However, all stocks in the sensex do not have the same PE ratio, which varies from sector to sector. A few blue chip stocks with a PE of below 10 at current prices are: Tata Steel(2.1), Hindalco(1.8), ONGC (3.5), DLF (4.5), Maruti Suzuki (6.8), RCom (7.2), RIL (7.4). To buy a particular low PE stock will depend upon its future growth potential because markets always discount the future. 3. Cash Ratio: Companies with a high cash in their books, will be able to tide over the liquidity crises in a much better way. On this basis real estate companies would be in more trouble in a crunch situation. Even those companies that have gone for acquisitions through high cost debt are vulnerable: eg. Tata motors, Tata steel, Hindalco.
• Astrological View: As I am not a qualified astrologer, the views expressed here are of prominent astrologers like Bejan Daruwalla. Stock indeces, it is beleived, have some correlation with planetary configurations. The month of October 2008 was volatile because of the confluence of Saturn and Jupiter, which are now moving in a much favourable position from November 3, 2008. December 2008 will again be a volatile month when US markets are expected to plunge to new lows. The situation will start taking a better turn from February 2009, and June- July 2009 will mark the return of the bull run.

Based on the combination of above factors it appears that Samvat 2065 will bring a lot of cheer to the stock markets in the latter half. Historically the bear run takes around 18 months to complete, so June- July 2009 meets the target for the start of the new bull run. In the meantime, volatility would be high so keep booking your profits at regular intervals to keep your liquidity intact, which can be used for buying blue chips when prices are down. Happy investing in the Samvat year 2065.

Global Markets Turmoil: A time to introspect

Diwali is round the corner, and there is a pall of gloom over the markets and in the minds of the investors. This will probably go down as the darkest Diwali in the living memory of most of us. This is because the sensex has lost over 53% of its value since last Diwali. It has fallen from 18737 (last diwali) to 8701 on 24th October 2008. The gains in the past 5 years (diwali to diwali) had been 50%, 57%, 32%, 27%, 61% respectively. So we are in a situation of doom after 5 years of boom.

Most of us have been teribbly off the mark in estimating the unprecedented fall in the markets. It's a time to introspect. Where did we go wrong:

• Greed factor: Many investors entered the markets at the wrong time to make a quick buck, and have burnt a deep hole in their pockets. This definitely is not the time to sell and wow not to enter the markets ever again, rather it is the time to take a break, do not focus on the movement of the sensex for a few days. Maybe you can get out of the market in the next rally (or relief rally) which could give you an upside of 20-25% soon.
• Fear Factor: Those investors who are having sleepless nights due to the fear of further losses, must take due care to address their stress levels, because inability to control stress can be fatal. Just remember, that the market was at unreasonable levels at 21000 on the sensex and even now at 8700 on the sensex. The fair value of the sensex is somewhere in between these two extremes. Wait for the cycle to complete, things will be back to normal in the next 6-9 months time.
• Notional Gain/Loss: Those of us who have enterted the market with a long term perspective (long term would mean a period of atleast 3-5 years) have no need to worry. Do not count your paper losses, but wait for the market to stabilise. There should be no doubt in your mind that your investments would fetch you a decent return in the long term. If your liquidity position permits you may add to your investments at these levels to bring down your average cost of acquisition.

It will be wrong to hazard any guess on the immediate movement of the sensex, but historic factors tell us that the rebound in the markets is also ferocious after steep falls. So this time too the markets would rebound with vengeance, once the liquidity crises is addressed. But we have to wait patiently to catch the next outbound flight, you never know how much delayed that flight is.

Wishing all investors a happy and prosperous 'DIWALI'. May this Diwali bring back the happiness to the markets and in the lives of all of us.

Liquidity crisis and RBI's dilemma

In January 2008 it was the case of excess liquidity driving the markets to crazy heights. Today it is the lack of liquidity which is driving the markets to unprecedented lows, which is far away from the fundamentals of the economy. RBI in its endeavour to give excessive importance to inflation management has stiffled liquidity in the markets. Inflation in India was mainly due to the commodity bubble which had burst in August- September 2008. RBI did not relax liquidity at that time, which has now cast its shadow on growth. The last weeks reaction of cutting CRR by 250 basis points and temporary repreive in SLR by 150 points is a step in the right direction, but it has come a tad too late. The impact of the cut is evident on some key rates, call money rates have eased to around 7% from 17%-18% last week. There is an urgent need to signal the end to the high interest rates by lowering the reverse repo rate by 50 basis points or more in the RBI policy announcement later this week. The market is gasping with baited breath for that 'lifeline'. Fundamentals of the economy remain qiute strong, hovever, the confidence of investors needs to restored at the earliest. Let us wait for the right signals from RBI on the 24th of this month.

Gold as an Investment Option

Gold jewellery traditionally has been a favourite of the Indian women. Investment in gold has often been a bone of contention between the spouses in the family. So the next time if the lady of the house wants to buy gold the men folk should not discourage her, but guide her to buy and store gold in a more profitable way. Let us see how?

Historic perspective: The world stock of Gold as at the end of 2007 was 161,000 tons of which 51% existed in the form of jewellery. Demand for gold is widely spread around the world. East Asia, the Indian sub-continent and the Middle East accounted for 72% of world demand in 2007. 55% of demand is attributable to just five countries - India, Italy, Turkey, USA and China, each market driven by a different set of socio-economic and cultural factors. Jewellery accounts for around three-quarters of gold demand. In the 12 months to December 2007, this amounted to US$54 billion, making jewellery one of the world's largest categories of consumer goods. In terms of retail value, the USA is the largest market for gold jewellery, whereas India is the largest consumer in volume terms, accounting for 25% of demand in 2007.

There are a wide range of reasons and motivations for people and institutions seeking to invest in gold. And, clearly, a positive price outlook, underpinned by expectations that the growth in demand for the precious metal will continue to outstrip that of supply, provides a solid rationale for investment. Of the other key drivers of investment demand, one common thread can be identified: all are rooted in gold's abilities to insure against uncertainty and instability and protect against risk. On average, governments hold around 10% of their official reserves as gold, although the proportion varies country-by-country.

Asset allocation is an important aspect of any investment strategy. To counter adverse movements in a particular asset or asset class, many investors now strive to achieve more effective diversification in their portfolios by incorporating alternative investments such as commodities. Even a small allocation to gold may significantly improve the consistency of portfolio performance during both stable and unstable financial periods. Gold is widely considered to be a particularly effective hedge against fluctuations in the US dollar, the world's main trading currency. Gold is unique in that it does not carry a credit risk.

What is the most rewarding way of investment in Gold?

• Investment in Jewellery/ Gold bars: Investment in jewellery form is the most innefficient way of investment in gold, as the making charges are too high and resale value is very low. Gold bars are an alternative, but they carry the risk of storage and theft.
• Buying Gold on Commodity Exchanges: It does not tentamount to investment but speculation and the brokerage paid is quite high.
• Buying Gold ETF's: By design, these forms of securitised gold investment, all regulated financial products, are generally referred to as Exchange Traded Commodities or Exchange Traded Funds (ETFs), and are expected to track the gold price almost perfectly. Unlike derivative products, the securities are 100% backed by physical gold held mainly in allocated form. In Indias currently 5 Mutual Funds are offering Gold ETF's. If you have to invest in gold, invest through this option. Your investments are totally safe and are subject to long term capital gains after one year like other MF schemes.

Ideally, one's portfoilo should hold 5-10% in gold.

End of Off season 'Sale' on BSE/NSE !

It's time for investors to loosen their purse strings and embark on a buying spree: The great sale on BSE and NSE is about to end. Remember, The glorius Thursday (10th January 2008) when BSE sensex scaled an all time high of 21207. Exactly 9 months after that glorius acheivement, black Friday (10th October 2008) is going to unfold before your eyes. Where will the index go: 10,500 or maybe 10,200 or a four figure mark (maybe not).

There is mayhem in stock markets world over, this panic all around signals that the worst may be nearing an end. Authorities the world over are taking drastic measures to restore the confidence of investors with a slew of measures. Our authorities are the last to react. You will hear several positive announcements from the Govt. and the regulators in the next couple of days. The markets are poised for a decent recovery thereafter. Don't panic, buy good quality stocks from a long term perspective and relax. Sectors such as Automobiles, Banking, Oil & Gas and Infrastructure development will be good bets at this juncture. These kinds of off season sales do not last forever!

Global Economic Crises: Is Indian Economy in good health!

There is panic all around, markets world over are nervous. How about the health of the Indian Economy? Fortunately, the ground reality does not suggest any major danger signals for the health of the Indian economy. As per the latest data the growth in bank deposits and credit has been to the tune of 23% and 26% respectively. The credit deposit ratio is over 73%. However, the pinch of RBI's tight monetary policy was being felt on the liquidity position of the banks which has been duly addressed by RBI through reduction of CRR by 50 basis points.

Inflation is showing signs of cooling off: Crude oil continues to drift below the $90/ barrel mark, prices of essential commodities have stabilised- open market price of wheat is now below the minimum support price announced by the Govt., commodity prices have come down to reasonable levels. Although reduction in CRR has been termed as a temporary repreive, it signals the end of the high interest regime and the interest rate cycle seems to have peeked. All these factors auger well for the Indian economy. A temporary spot of bother, however, is the rapidly depreciating rupee. Once a trend reversal is evident in the price of rupee, foreign investors will return to India. Even a GDP growth of 7-7.5% for the Economy for FY09 should be considered excellent in the backdrop of global meltdown.

What about the Equity markets? The all round panic situation suggests that the markets have bottomed out. The bear phase that started in January 2008 is expected to last for about 18 months. We are midway through that period currently. While the first phase saw forming of lower tops and bottoms, we will soon see formation of higher tops and bottoms. While the policy in the first leg of the bear phase is 'Sell on every rise', the policy in the second leg of the bear phase is 'Buy on every decline'. It is time to accumulate blue chips for building a long term portfolio.