Curtains to an eventful year in Global markets

Year 2009 will be remembered for the roller coaster ride that saw the fortunes of investor community swaying between 'doom & boom'.  Most global markets rose handsomely from their yearly lows. The broader stock indices in India, SENSEX and NIFTY recovered over 100% from the lows touched in March 2009. The year also marks the end of the most eventful decade in the history of India. From a sleepy economy growing at around 4% p.a. India has been transformed into a vibrant and fast growing economy with the GDP growth touching a high of 9% during the decade.

A large part of the economic turnaround and the equity markets rebound can be attributed to the liquidity overhang, initiated by the Federal Reserve and followed by other Central banks in the shape of fiscal stimulus packages. The first 3 months of the year upto March 2009 resulted in dollar outflows, but since then FII's have pumped in more than US$ 15 billion into our markets. Moderate inflation coupled with low interest rates helped in the turaround of the corporate sector. The economy is now likely to grow at around 7.5% during fiscal 2009-10, despite a poor monsoon. Although volatility continued to dog the markets in 2009, yet risk appetite has returned back to the markets.

The market regulators on their part have played a very positive role in the interest of small investors. The abolition of entry load on Mutual Funds, and reduction of charges on ULIPs are a welcome measure. The regulators have taken measures to improve transparency while selling of financial products. By the end of the year buying/ selling of Mutual Funds through stock exchanges has also materialised. The year also saw unveiling of the draft Direct Tax code, which envisages sweeping changes in the Income Tax structure. The 'Satyam' scam that erupted in the beginning of 2009, encouraged the Govt. to come out with ammendments in the Companies Act to safeguard the interests of minority shareholders. The new pension scheme for individual investors came into force from May 2009.

Year 2009 is ending on a bullish note, a year in which investors would have made money in most financial assets. At this juncture the risk-reward ratio is looking slightly stretched, and investors are advised to tread cautiously in 2010, as making money would not be easy. Portfoilo selection would be a tough task during the coming year, and the role of a matured financial advisor would become more important if money is to be made in the markets. Indian economy continues to be in good shape and the bottomlines of the companies are likely show a decent growth. However, the following negative factors should be watched carefully or else it may spoil your party in 2010:

• Inflation (WPI) has started to rise at alarming levels, it may cross 7-8% by March 2010.
• Withdrawal of stimulus packages may put pressure on the dollar, and may sqeeze the liquidity in the system.
• Political turmoil is feared in the country after announcement of the formation of 'Telengana'.

Future of US Dollar: Implications for the Markets

The foreign exchange market is the largest, and most liquid financial market in the world, with  participation from governments, corporations, institutions, investors, central banks, contributing to  a global turnover in excess of US$3.2 trillion per day. At the heart of this global market is US Dollar, a currency which has retained a ‘monopoly’ position as reserve currency, and serves as the most widely adopted currency of international trade and capital flow. For the last two decades or so, US Ddllar’s share of global reserves has remained around 65-66%. Ever since the financial crisis of 2007-08 questions are being asked about the legitimacy of US Dollar as a reserve currency.

Historically speaking, the Federal Reserve Act was put in place in 1913, since then the value of the U.S. dollar has gone down approximately 96%. Most of this devaluation occurred after 1971 when former President Nixon repealed the Gold standard. For detractors of the Federal Reserve, it is a Corporation of Private Bankers which has nothing 'Federal' about it and it has no reserves. They see Federal Reserve as controlling a Banking system designed to enslave the US Govt. and US citizens. There are enough reasons that despite scepticism US  Dollar continues to dominate the international currency market. In the near term with low interest rates and low inflation in the US there is little threat to the dollar. The term BRIC is only on paper, with India and China at loggerheads on many issues. There are concerns about the decline of US Dollar against Euro and other Europian currencies, but there is no threat to Dollar as a trading currency in Asia and other emerging markets. 

So what is going to be the future of US Dollar in 2010, and its implications for other asset classes that are inversely related to it? There is always a hope for the dollar, that the US economy will recover, or the FED will increase the interest rates that have been pegged at artificially lower rates. However, a majority of the economists feel that the Dollar is on a continuous downward journey due to the wrong policies pursued by the FED. The rebalancing of the global economy would necessisate a lower dollar, as the current strength of the dollar propped up by the foreign Central Banks allows US citizens to import products which they cannot afford to consume. According to experts, unless the FED takes corrective measures the Dollar is headed for a collapse. When this will happen is beyond the calculations of economists, perhaps 'Crystal Gazers' could provide the answer! According to a renouned US astro-expert July-August 2010 may cause a serious collapse of the US Dollar and a crisis within the FED. The asset classes that can protect the investors in such a situation are commodities and specifically a widely traded commodity like 'Gold'. Perhaps, the theme for 2010 could be: "All that glitters is Gold." It makes sense to have 10-15% gold in your portfolio.

Don't fall prey to the greed of your Distributor/ Broker

SEBI has recently announced a few important changes in the way Mutual Funds will be sold. The first change was the removal of entry load on selling Mutual funds, and the second important change has been allowing the buying/selling of Mutual Funds through stock exchanges (which is applicable to those investors who already have a DEMAT account). These changes have been initiated by SEBI for the benefit of the investor community, and are likely to have far reaching consequences on the way Mutual funds will be bought/ sold in the future.

The first step, which is an attempt to reign in the commissions of fund distributors, was expected to have a negative impact on the Mutual Fund NFO's in the short term. But on the contrary, new fund offers opened recently have had a relatively better run as far as subscriptions are concerned. This is because most distributors are advising their clients to offload their holdings in old schemes where they have made profits, and enter the new schemes. The catch is that even after the abolition of the 2.25% entry load which was borne by the investor, most fund houses are offering a higher commision, which could be as high as 4-5% for selling NFO's. On the contrary, the distributors are shying away from selling existing schemes as the commission earned on them is low. Does this make sense for the investor? In one way it temtamounts to mis-selling, as the investor is denied the benefit of investing in an established scheme, where the track record of the Fund House/ Fund Manager is known. From a Financial Planner's point of view, investment in an old scheme with an excellent track record is always preferable over a new and untested scheme.

With effect from 30th november 2009 it has become possible to invest in Mutual funds through a stock broker using NSE platform. This new route for MF investment is hassle free and reduces the cost of transaction. However, most of the brokers may not be in a position to give the best Mutual Fund advice, again due to his greed for earning more commission/ brokerage. There is the lurking danger of Mutual Funds being treated as trading stock, instead of a vehicle for long term investment.

There is an imperative need for independent Financial Advisors to fill in the gap and guide the investor on his investments based on his need analysis, foresaking the lure of selling a product that is not in line with the investor's aspirations for the sake of earning a slightly higher commission. They must appreciate the fact that genuinine investors value good advice, which can more than make up for the loss of commission in the long term. Investors need to be beware of the temptation to treat Mutual Funds as trading instruments, because by doing so they will be falling prey to the greed of others, and will be losing out on an opportunity to create long term wealth.

Reality check on Real Estate prices

The realtors are trying very hard to convince the buyers that real estate market has revived. But they are creating their own nemesis by increasing the prices too fast too soon in the past few months, whereas the ground reality points to a supply demand mismatch. Most of the real estate firms are looking for short term gains at the cost of long term growth of the real estate market, by raising the prices at this juncture. The idea of affordable housing is being missed out by these firms.What has happened in Dubai yesterday, may also have a negative impact on the real estate market in india in the near term.

Interest rates do serve as a dampner for growth of real estate market, but high prices are a bigger threat. Wheras, the current lower interest rates scenario for housing finance should have been used by real estate firms to sell their inventory at affordable prices. Dropping sales post September 2009, are a cause of concern for the growth of real estate market. According to a research report the inventory to sales ratio which was at a comfortable level of 2:1 in 2005 has gone up drastically to 12:1 in november 2008. This does not auger well for the orderly growth of the market. The operators are jacking up the prices of projects to improve the valuations of real estate firms, many of whom are slated to raise funds through QIP's and IPO's.

The absence of a real estate index has hampered the orderly growth of the real estate market. NHB's Residex launched in 2007 which presently covers 15 cities, is yet to establish itself as a barometer for determining supply and demand of real estate. Ideally, a rental value in excess of 4% p.a. of the price of the property should act as the benchmark. If people are demanding more than this, we might be moving into the bubble zone. Investors are advised to evaluate all factors before investing in real estate, seek bargains from the sellers to take advantage of the buyer seller mismatch. Better still, it would be advisable to wait for a realistic correction to set in, especially if you are buying a second property for the sake of investment.

India's Top Brands

Marketing guru Peter Drucker once said "Marketing and Innovation produce business results all the rest are costs". Over the years 'Brand value' has acquired a lot of significance, as it helps distinguish great companies from the ordinary. A brand is defined as a name or trademark connected with a product or producer. There are two aspects of a brand: Experiential and Psychological. The experiential aspect consists of the sum of all points of contact with the brand and is known as the brand experience. The psychological aspect, also referred to as the brand image, is a symbolic image created within the minds of people and consists of all the information and expectations associated with a product or service. Creative brand management supported by an innovative advertisement campaign helps the company products/services command a premium in the market. This has lead to brands being given a notional value which forms a part of the intangible assets of the company in its balance sheet.

The recently released edition of India's Most Valuable Brands 2009 (IMVB) study puts Reliance Industries (RIL) at the top, followed by state owned State Bank of India (SBI) and Indian Oil Corporation (IOC) in the 2nd and 3rd place respectively. The study conducted by London based brand valuation firm 'Brand Finance' in association with the Economic Times throws up some interesting facts:

• The study has included companies listed on BSE, and has not considered holding companies, hence some important names like Hindustan Unilever Ltd. (HUL) and AMUL have been omitted.
• The valuation is based on 'Relief from Royalty' approach, which assumes that the company currently does not own the brand and how much it would need to pay to license it from a third party.
• The sectoral break up top 50 most valuable brands is: Banks/ Financial institutions (9), Auto/ Auto anciliary (7), Oil & Gas (5), IT (4), Communication (4), FMCG/ Retail (5), Infrastructure (4), Steel Makers (2), Pharma (2), Others (8).
• Despite recession, the brand value of top 50 Indian companies has remained constant at US $67 billion.
• There are 19 companies with a brand value in excess of US$ 1 billion.
• The top 3 companies have brand values of: RIL (US$ 7.8 bn.), SBI (US$ 5.5 bn.), IOC (US$ 4.2 bn.). Brand value of RIL grew by 15% and that of SBI by 30% during the year.
• The biggest gainer is Tata Power (84%) and the biggest loser is Jet Airways (-56%).
• The strongest brand in terms of rating turns out to be Bharti Airtel (overall ranking 7th) with a AAA rating. RIL & SBI have been rated AA+.

World Economy out of Recession: Is it a time to rejoice!

Warren Buffet, the legendary investor of our times, has declared that the worst ever financial crises that gripped the world markets last year is behind us. And he has enough reasons to beleive so. US economy has shown positive growth in the 3rd quarter of this year, after four consecutive quarters of negative growth. The Eurozone has also come out of recession in the 3rd quarter, the 16 nations comprising the Eurozone reported a combined GDP growth of 0.4%. However, a sliding US Dollar poses a serious threat to the Eurozone recovery (The dollar has slipped 18% against the Euro in the last quarter). It is not a time to rejoice yet as the recovery is mainly on account of the support from Govt. stimulus packages and temporary inventory effects.

However, CHINDIA (China and India), continue to lead the global economic revival.  As per the current IMF forecasts for global economic growth, China and India together would account for 14.5% of the world’s GDP by 2014 at market exchange rates and 21% in PPP terms. Their current share is around 9% of world's GDP. The 3rd quarter GDP growth for China has been an impressive 8.9%. In October '09 China's manufacturing index recorded the highest growth in last 18 months. India's IIP growth at 9.1% for September '09 has been better than the analysts' expectation. India is on course to record a GDP growth of 6.5-7% for this fiscal. The Govt. is seriously devising measures to reign in the widening fiscal deficit. One such measure is to spend money raised from PSU divestment to create assets for the social sector.

These positive developments have lead to a strong revival in global equity markets. The risk appetite of investors has improved due to the positive announcements. Although ahead of fundamentals, the markets are reflecting the positive sentiments expressed by investors like Warren Buffet. From now on, any dip in the markets will be an opportunity to add equity investments to one's portfolio.

Contrarian Investment Strategy: It pays to be different!

Behavioural Finance tells us that markets swing between the extreme emotions of greed and fear. Market movements generally reflect the irrational behaviour exhibited by a group of investors working towards acheiving a common objective. Various theories/strategies have been propounded by experts on stock market investing. One such strategy is the 'Contrarian Investment Strategy'.

A contrarian strategy is one that relies on making profits by investing in a manner that differs from the conventional wisdom, hoping that the the consensus opinion will prove to be wrong. A contrarian believes that crowd behavior among investors can lead to exploitable price differentials (underpricing or overpricing) in securities markets. Practicing the contrarian investment strategy can lead to above average gains from the markets. A contrarian seeks opportunities to buy or sell specific stocks when the majority of investors appear to be doing the opposite. This approach has the tendency to misfire in the short term, as you are trying to swim against the tide. Patience is the key to succeed as a contrarian investor. Commonly used contrarian indicators for investor sentiment are Volatility Indexes (informally also referred to as "Fear indexes") like VIX, which track the prices of financial options.

Contrarian investment strategy has similarities with value investing strategy as the contrarian is also looking for mispriced investments and buying those that appear to be undervalued by the market. Warren Buffet is one of the legendary investors of our times who has used cotrarian strategy to make windfall profits on the markets. Some Mutual Fund houses in india have also floated specific 'Contra funds' that follow the principle of contrarian investing. Let us take an example: last year in January '08, at the peak of the bull phase there were a few takers for automobile companies in India. Most of these companies from the forward group like Maruti, Hero Honda have proved to be the best performers one year after. Similarly, at the current juncture, telecom sector has been given a thumbs down by the markets, and most analysts are negative on the sector for the next couple of quarters. A blue chip stock like Bharti Airtel is quoting at an all time low PE multiple of 12. If somebody invests in this stock today, using the contrarian strategy, I am fairly optimistic that he/ she would be able to make decent gains in the next 1-2 years.

RBI Quarterly Review: Exit from easy money policy!

The clock has turned full circle. After consecutively increasing the liquidity in the system over the 6 month period from October 2008 to April 2009, RBI has finally given a signal for reversal of the easy money policy. Although most key rates (CRR, Bank Rate, REPO and Reverse REPO) have been held constant, a signal for reversal comes by way of hiking the SLR (Statutory Liquidity Ratio) to 25%, a rise of 100 basis points. The immediate impact of the hike will not be much, as the average SLR maintained by sceduled commercial banks is 27.6%, well above the target of 25%.

The main concern voiced by the RBI Governor is on the inflation front, RBI's March '10 projection for headline inflation has been hiked upwards to 6.5%, keeping in view the pressures from tightening food prices. We would have to wait for the winter crop to hit the markets by the end of calender 2009, to see the actual impact on food prices. But, RBI's stance is loud and clear: It values inflation management as its first and foremost task, while keeping the economic growth intact. There are some indirect measures in the policy which would take out the ecxess liquidity from the system;

• Bank's borrowing from the Money market, not considered for CRR calculation till now be taken into account for CRR calculation
• There has been a hike in provisioning requirements for loans given to Commercial Real estate developers. Provisions on standard assets hiked from 0.4% to 1%. NPA coverage ratio for commercial loans hiked to 70%.
• Export credit financing reduced to 15% from 50% earlier.
• RBI has also signalled a reduced money supply growth rate for the fiscal 09-10, indicating that a CRR hike is due in the next quarter.

The recent stock market rally which was fuelled by excessive liquidity seems to have been punctured by the RBI policy. It is an excellent step by RBI to take care of bubbles that could create a lot of trouble later if allowed to grow. On the other hand, the stock prices decline offers investors an opportunity to buy sound stocks for long term at reasonable levels. The long term survival of bull markets always depends on lower inflation levels.

Samvat 2066: Return of the Bull Run!

We are in Samvat 2066 as per the Indian Calender. Diwali is an auspicious time for the investor community to  take stock of the past performance and analyse of the future of the markets. I am sure most of you must have made substantial gains during the past year, had you kept your cool during the turbulent times when the markets were down in the dumps. For me also it has been a very satisfying year as far as 'Wealth Creation' is concerned. If I go back to history, I recall the gloom of last Diwali when most investors felt that everything is lost. This Diwali has given most of them enough reasons to smile. Before I go on to a detailed prognosis of Samvat 2066, I would like to recall my perceptions about Samvat 2065, posted on my blog on 27th October 2008. I was pretty hopeful of a decent recovery at that time, but the stock markets have moved far ahead of my reasonable expectations.

It is time to analyse what lies ahead during SAMVAT 2066:

• Technical Factors: The water shed event for sustained market uptrend was the installation of a stable Govt. in India during May 2009. Markets which were in a bottoming out situation at that time, got the trigger to move into a new orbit by the declaration of election results. The gap created in May 2009 between 12500-14000 on the Sensex and correspondingly 3800-4200 on the Nifty will technically act as a strong base going forward. Technically, the markets are ripe for a strong correction before the end of calender year 2009, considering the sharp upswing witnessed since July 2009. Whenever markets move closer to the upper end of the range suggested, investors must buy strongly for the long term. Thereafter, markets are poised to retest the earlier top of 21000 on the Sensex by Diwali next year. We have to keep our fingers crossed to see whether it happens or not.
• Fundamental Analysis: The factors that favour the 'Return of the Bull Run' are a stable economic scenario, low interest rates with moderate inflation, a strong currency. So far the Govt. has given enough indications of a fast track reform process coupled with strategic dis-investment. Interest rate scenario is favourable for higher economic activity, but inflation is a bit of concern. The way India has tackled global recession has been appreciated by international community. The strength of the Ruppe is an indication the FII's are positive on the Indian economy. Although the valuations of most of the frontline companies look stretched at the moment, the growth in profits during 2010-11 will ensure that valuations become attractive in the second half of FY 2010-11. Indian economy's massive push towards sustainable growth will be trigerred by the hosting of Common Wealth games in Delhi during October 2010.
• Astro Analysis: Based on the views of renouned astrologers, markets are poised to regain their glory after a brief period of correction during Oct-Nov 2009 and January 2010. Bejan Daruwalla has forcasted a market range of 13200-18500 for the Sensex for Samvat 2066.

Considering all the above factors I feel that investors are in for some good times during Samvat 2066. But making money this year may not be easy, because the frontline stocks are looking a bit stretched on valuations. Rather it would be a year of the Midcap stocks, provided you are able to identify the right stocks after careful analysis of their underlying strength. Specific sectors that are likely to outshine are those which focus on the domestic growth story: Retail, Pharma & Healthcare, FMCG, Media, PSU Banks, Hotels & Tourism. There is no doubt in my mind that the 'Mother of all Bull Runs' has arrived. Stay invested, add on declines to profit from the India growth story for the next 3-5 years.

Equity Research in India

Every morning when you scan the pages of a financial newspaper you would come across some Buy/ Sell recommendations. The 24 hour business channels dish out these recommendations throughout the day. How reliable are these equity research reports for the common investor? Presently, most of the research is carried out by brokerages, and their efficacy can be questioned because of the direct conflict of interest as the brokerage recommending a particular scrip may be having positions in that particular scrip. As the system of disclosures in India is inadequate, it is difficult for the retail investor to rely on these reports. Further, less than 6% of the companies listed on Indian bourses are covered by the analysts.

There has been a long impending need for independent equity research in india. Ideally the research agency should be independent of the marketing function in independent research. Globally, there are three models for independent research:

• Sponsorship of ratings by the company as followed in Hong Kong
• Paid research by Stock Exchanges, as practiced in Singapore
• Research reports commissioned by investors.

One of the frontline rating agency CRISIL (A subsidiary of Standards & Poor),  has recently stepped into the field of independent equity research. It remains to be seen which of the above models will be used by CRISIL for its equity research. However, this will be the first serious attempt at independent equity research in India. CRISIL plans to cover not only the frontline stocks but also mid cap and small cap stocks through its research. Grades will be awarded to the stocks on a scale of 1-5, and the rating agency will abstain from giving a Buy or Sell recommendation. CRISIL has come out with first set of research ratings on 13 companies in its first report. This appears to be a good opportunity for retail investors to get an access to unbiased research reports. It is sincerely hoped that this trend will gather momentum in the future.

Economic Outlook: Mixed signals

If one is to be guided by the stock market movement of recent weeks, it points to a strong economic revival in Indian as well as World economy. But the ground data suggests that all is not well to get that euphoric about economic revival. First, the major positives for Indian economy are:

• GDP growth for June '09 quarter has bounced back to 6.1%, after languishing for 2 quarters.
• The IIP (Index of Industrial production) numbers at 6.8% for July '09 (although slightly lower than June '09) look quite promising.
• There has been a squential improvement in exports & imports, despite negative growth as compared to corresponding period of last year.

However, there are certain threats which still loom large over a speedy economic revival:

• The overall growth in Bank deposits & Bank credit have steadily declined to a growth of around 20% and 14% respectively
• WPI inflation has climbed to a positive territory (0.83%), after remaining in negative zone for over 3 months. The inflation measured as per CPI for industrial workers has grown at over 11% in August '09. WPI inflation is expected to touch 7% by march '09
• The monsoon season has just eneded with a deficit of 23% over the long term average, its worse performance in 30 years. This will put additional pressure on food grain prices.

Global economic indicators pose a much greater threat to an early economic revival:

• US unemployment rate for Sept. '09 at 9.8% is the highest since 1983.
• IMF has warned of further write downs from banks in Europe for atleast a few more quarters.
• The continuing weakness of US $ is a matter of concern for many countries, who have put money in US treasury.

These indicators suggest that although the worst may be over for world economy, revival at best will be slow. Investors shuold not hope for miracles like a V-shape recovery any time soon.

Market Moves: It's time to exercise caution

It was around this time 2 years ago that our markets embarked upon the frenzied climb to Mount 21000 on the Sensex. And the end result was a steep fall to sub 8000 levels within 11 months from the highs created in January 2008. A majority of the analysts were talking of levels above 25000 at that time. Eversince the market touched 17000 on the Sensex (5000 on the Nifty) recently, these analysts are back to their old games. Investors are being advised to buy stocks at high prices, as if there is no tomorrow. Generally, the feeling of being 'Left out' lures retail investors to make the same mistakes repeatedly. Even Mutual Funds which were sitting on huge piles of cash when the markets were down in dumps, have invested heavily in the markets and their cash levels are down to between 5-10%. Agreed, that the economy is on a recovery path, but the process will be very slow and steady, and one should not expect the profits of the companies to rebound so soon to command such rich valuations. Foreign Institutional Investors have turned cautious at higher levels, and we may witness rounds of FII selling in the days to come. For retail investors, it is time to be patient. Generally, small investors who are worried about the safety of their principal investment should keep away from the markets at this juncture. Investment through SIP/STP may be continued, but do not get disturbed if the NAV of your fund temporarily dips below your average purchase price.

But this does not mean that there are no good opportunities to buy at this juncture. History tells us that every new bull run is made up of new market leaders, whereas the old winners fall by the wayside. At the current valuations most of the leaders of the last bull run like Reliance, L&T, BHEL, etc. look either fully priced or overpriced. On the other hand Auto and Realty sectors have had a fairly good run in the recent past, so they are also richly priced at current levels. If selective buying has to be considered, sectors like Retail (Pantaloon, Videocon, Geetanjali), Pharma & Healthcare (Ranbaxy, Fortis) etc. can be considered on dips.

But to reap  good returns from this market one must  have a minimum  investment horizon of 1-2 years, because that would be the time when corporate earnings catch up with the valuations. Yet, the market may surprise us on the upside because of the excess liquidity available in the system.

IPO Pricing & Listing Gains

Initial Public Offering (IPO) is as an exercise when an unlisted company makes either a fresh issue of securities or an offer for sale of its existing securities or both for the first time to the public. For example, the recent Oil India IPO had both the above components. Subsequent issue of securities by an already listed company is referred to as Follow-on Public Offering (FPO). The IPO can be in the form of a fixed price option or in the form of a book building method. In India, currently the 'Book Building' pricing method is in vogue. This method provides an opportunity to the investors to decide a fair valuation of the issue through the 'Price Discovery mechanism'. In a book built issue allocation to Retail Individual Investors (RIIs), Non Institutional Investors (NIIs) and Qualified Institutional Buyers (QIBs) is in the ratio of 35: 15: 50 respectively.

There was a time when investors made a beeline for new issues for the sake of reaping decent 'listing gains'. After a lull in the IPO market due to the crash in secondary markets, the primary market is again buzzing with activity, with a large number of companies getting ready to tap the primary market through IPO's. But the poor post listing performance of a few prized IPO's (Adani Power & NHPC) has made the retail investors lose interest in the primary market. A retail investor refers to an investor who applies or bids for securities for a value up to Rs.1,00,000. For this reason the Oil India IPO received a less enthusiastic response from retail investors. However, qualified institutional buyers (QIBs), who invest with a long term perspective are quite bullish about the new issues hitting the markets. It seems there is ample liquidity to take care of the future IPO's getting a decent response from QIBs.

Small retail investors will have to be careful in choosing an IPO for investment, and not be guided by vested interests promoting the issues through media. Since most of the new issues are being priced aggressively, including the new issues by Public Sector companies, the chances for making listing gains are few. If one has to invest in a good IPO one should invest with a long term perspective and not merely for listing gains. SEBI has made rating of new issues an optional exercise, but a majority of the companies get their IPO's rated by rating agencies (CRISIL, ICRA, FITCH etc.). The grades assigned to companies are avilable on NSE's website. The highest rating is a 5-star rating. Amongst the recent IPO's, the issues of OIL India Ltd. and Mahindra Holidays and Resorts Limited have been awarded a 4-star rating by CRISIL & FITCH respectively. Before investing in any IPO, retail investors are advised to go through the Red herring prospestus (RHP) carefully, or seek the opinion of their Financial Advisor.

Beware of Accounting Jugglery!

Better than expected first quarter results have brought cheer to the Indian stock markets. A prima facie analysis of the overall financial performance of India Inc. may have been enough to convince the bulls that the Indian economy is finally out of the 'Recession blues'. However, the quarterly results of a few companies are a result of some financial jugglery, and thus should be taken with a pinch of salt. As per the notification issued by Ministry of Corporate affairs (MCA) in April 2009, provisions of AS11 have been suspended for a period of 2 years effective March 2009. As per AS11 companies are required to mark to market (MTM) their Forex assets and book gains/ losses in their Profit & Loss account on QOQ basis.

Taking advantage of this notification, quite a few companies have changed their accounting policies w.e.f June'09 quarter thus increasing their profits. For example, Tata Motors reported a net profit of Rs.514 cr. for quarter June'09, which reflects an increase of 57% over corresponding quarter last year, despite a drop of 8% in its sales. A foot note to the results says that last year profit would have been Rs.502 cr. as per the amended AS11. Another company Moser Baer has reported a net profit of Rs.43 cr., which is higher by Rs.146 cr. due to the amendment in AS11. In real terms the company would have suffered a loss of Rs.103 cr.

These are just two examples of accounting jugglery. Many more companies would have resorted to such accounting practices to boost their bottom line. But this makes comparison of company results a much more complex affair. Investors must take cognizance of the foot notes in the company balance sheet before taking a decision to invest, rather than being taken for a ride!

Affordable Housing: 'Panacea' for the Realty sector

After euphoric times 'Realty sector' seems to have hit a low in the past one year. There are very few takers for the super luxury apartments offered by the Realtors. Caught with severe cash crunch and falling sales most realty firms are busy selling their land banks to improve cash flows. The murmurs about 'Affordable housing' are now being heard in the Board rooms of the real estate developers. Those companies that have announced new affordable housing schemes have got a better response in the recent past, whereas those offering premium housing are still looking for clients.

According to research firm 'Knight Frank' there will be an additional demand for 45000 affordable housing units in NCR region alone in the next 2 years. The research also says: largest contributor to this demand would be the Rs.3-6 lac income group. The maximum affordability for a household is around 5 times its annual income, for example a household with an annual income of Rs.3 lacs can afford a house worth up to Rs.15 lacs. If households buy more expensive houses, the chances of default in repayment are higher. The unit area for a affordable housing project is between 600-1200 sq. ft. (average size of the apartment is around 850 sq. ft.). But many companies are still offering units above 1200 sq. ft. which are not really affordable. Real estate firms will have to catch with the ground realities and start offering real affordable housing. After all there is no dearth of demand by genuine buyers. The interest rate scenario points to a stability in interest rates in the near term, which is a great impetus to the dream of providing affordable housing to the people of India.

Prices will need to become more realistic if developers have to succeed in finding enough buyers. As land costs need to be sufficiently lower for an affordable housing project, most of the affordable housing projects are likely to come up in suburban areas, given the prohibitive cost of land in cities. There is also an urgent need to develop innovative ways to reduce construction costs without compromising on the quality of housing. There is also an urgent need to look at the use of newer, energy efficient, environment friendly materials and innovative construction technologies. This will help construction companies/ builders improve demand and will eventually help them improve their cash flows.

ULIPS made more attractive

Unit Linked Insurance Plans (ULIPs) are set to become attractive long term investment plans w.e.f 1st October, with the proposed changes announced by the regulator IRDA. IRDA believes that ULIPs are akin to Mutual Funds with an added insurance cover thrown in. Emphasising on the long term nature of ULIPs, IRDA proposes to increase the lock-in period in respect of ULIPs to 5 years as compared to the existing lock-in period of 3 years.

The regulator had earlier announced capping of fund management charges on all insurance contracts to 135 basis points. The other charges payable by the investors are: premium allocation charge, policy administration charge, mortality charge and charges for additional 'riders' included in the policy. The regulator proposed the overall charges on insurance contracts to be capped at 225 basis points for contracts over 10 years and 300 basis points for contracts up to 10 years. It implies that if the earning of the fund is 15% a minimum return of 12% must be payable to the policy holder. However, keeping in view the nature of an insurance contract, mortality charges have been left out of the overall ceilings announced. The mortality charge varies with the age of the client/investor - mortality charge is higher as the age increases.

As ULIP products directly compete with Mutual Fund schemes, the recent changes in the load structure on MFs (Entry load on MF schemes has been abolished from 1st August 2009) announced by SEBI has prompted IRDA in making the necessary changes in respect of ULIPs, positioning them as a long term investment alternative.

Model Direct Tax Code: Taxation Simplified

The Govt. recently unveiled the 'Model Direct Tax Code', which is likely to replace the Income Tax Act 1961, by 2011. This signals simplification of the tax system, improving efficiency of the system and expansion of the tax base. It is a step towards tax reforms in India and may grant independence to tax payers after 50 years of introduction of IT Act. The main architects of this code are:

• Pranab Mukherjee, Finance Minister, who has fulfilled his budget promise.
• P. Chidambaram, former Finance Minister, considered to be the brain behind the code.
• Arvind Modi, Jt. Secretary, Tax Policy & Legislation, CBDT.
• Anita Kapoor, Jt. Secretary, Foreign Taxation, CBDT.

The salient features of the Direct Tax code are:

• Liberalisation of Tax slabs - Up to Rs.10 lacs (10%), Rs.10-25 lacs (20%), beyond Rs.25 lacs (30%). The basic exemption limits to continue.
• Classification of Tax payers - The separate categorisation of Resident but not ordinarily resident (RNOR) to be abolished. This will lead to increase in number of tax payers.
• Introduction of EET regime - The exempt-exempt-tax (EET) method would entail tax on withdrawal of savings including PF. The existing savings in the funds up to 2011 will not be taxed.
• Increase in deductions - The limit for deductions (currently at Rs.1 lac under sec 80C) will go up to Rs.3 lacs, but deductions on repayment of Home loans will not be available.
• Allowances will be taxable - Allowances such as HRA, LTA etc. will be added to income and will become taxable. Interest paid on Home loans will not be exempt from taxes.
• Removal of Surcharge - The tax system will be simplified by removal of surcharge
• Revamp of Wealth tax - The current exemption limit of Rs.30 lacs will be enhanced to a whopping Rs.50 crores. Thereafter, wealth tax will be levied at a fixed rate of 0.25%.
• Corporate tax reduction - It it proposed to levy a uniform tax of 25% on domestic as well as foreign companies.
• Computation of MAT to be simplified - Basis of levying Minimum Alternate tax (MAT) will be shifted from profits to assets. Even loss making companies will be liable for tax.
• Long term & Short term Gains: The distinction between the two stand removed, tax on capital gains will be charged at normal rates. It will result in higher cost of investment transactions.

The code promises to usher in an era of greater transparency in taxation matters, and hopefully will make the life of Tax payers hassle free.

Market correction: An opportunity to buy for long term

Stock markets world over are being driven by excess liquidity, but the valuations seem to have been stretched too far at this point in time. But based on fundamental analysis, the 'Margin of Safety' for a large number of stocks, especially the front line stocks, is under threat. Is it the time to buy for long term? Serious long term investors can wait for markets to correct around 10-15% from current levels to buy for long term.

Incidentally, market participants have a tendency to factor in the good news immediately. The good news about a possible revival of World economy by early next year, good set of quarterly results, have already been factored into the stock prices. But the markets may still continue to rise in the short term because of the comfortable liquidity position. However, markets tend to ignore the negative news for a great length of time. 'Behavioral Finance' would tell us that people tend to be in a denial mode for long before bad news actually catches with them. Remember, the signals for an impending global crises were ignored by the markets in the early part of 2007, when the sub prime crises broke out in the US. The after effects and the magnitude of the crises are known to all of us now.

At this juncture Indian markets are ignoring 2 important factors which may have far reaching impact on Indian economy:

• Failure of Monsoon: It is almost certain now that we are heading towards a deficient monsoon year (the worst in past 8 years). The impact of this could lead to a decline of GDP by 0.5-1%, depending on the distribution of the rainfall in the remaining part of the monsoon season. The 'El Nino' factor could worsen things further. rural demand may suffer, which is bad news for FMCG and Auto companies.
• Spread of Swine Flu: The speed with which the cases of Swine flu are being reported is likely to create a panic like situation. Some sectors like Hotels and Aviation would become the necessary victims of the spread of swine flu.

We continue to be in a denial mode about the likely impact of these two events. However, whenever reality dawns on the markets, they will correct substantially from the current levels. That would be a great buying opportunity for long term (long term means a holding period over at least 2-3 years).

ULIPs under the lens of IRDA

It is good news for investors. Close on the heels of Mutual Fund regulator SEBI scrapping the entry load on all MF schemes w.e.f. 1st August 2009, it is the turn of the Insurance regulator IRDA announcing a cap on charges levied on ULIPs. ULIPs are very popular amongst investors, accounting for over 80% of the new business premium collected by private insurance companies and around 65% new business premium for LIC.

According to IRDA, the difference between gross and net yields to a policyholder should not exceed 300 basis points (3%) for policies maturing within 10 years (fund management charges capped at 1.5%), and 225 basis points (2.25%) for policies maturing in more than 10 years (cap on fund management charges at 1.25%). Gross yield is the yield generated by the ULIP before all charges are deducted, and Net yield is the yield generated by the ULIP after all charges are deducted. To make the ULIPs more transparent the insurer at the time of maturity will have to issue a certificate showing details of year wise contributions, charges deducted and fund value. Experts are of the view that these measures would establish ULIPs as long term insurance plans. It makes the ULIP products more attractive than similar products available in the market.

The new regulations will become effective from 1st October 2009, for all products approved by the regulator after this date and all the existing products that do not meet the requirements are required to be withdrawn or modified by 31st December 2009.

Disinvestment demystified

Disinvestment (sometimes referred to as divestment or deivestiture) refers to the action of an organization or government to sell or liquidate, wholly or partially, an asset or subsidiary. It is the opposite of an investment. There could be several motives for disinvestment:

• A firm may divest (sell) businesses that are not part of its core operations so that it can focus on its core operations. For example, selling of cement business by L&T.
• Another motive for divestitures is to obtain funds by selling one of its businesses in exchange for cash. For example, Unitech selling its Hotel properties to generate cash.
• A third motive for divesting is that a firm's "break-up" value is sometimes believed to be greater than the value of the firm as a whole. This process is sometimes referred to as 'Spin off'.

The term 'Disinvestment' is seen in the Indian context from the point of view of divestment of Govt. stake in state run enterprises. The markets were visibly upset when there was no concrete announcement on divestment in the FM's budget speech. The history of disinvestment goes back to the liberalisation of the Indian economy in 1991. The Department of Disinvestment was set up as a separate department on 10th December,1999 and was later renamed as Ministry of Disinvestment from 6th September,2001. From 27th May, 2004, the Department of Disinvestment is one of the Departments under the Ministry of Finance. Total proceeds from stake sale in state run enterprises till 2007-08 is Rs.51,600 crores. There are diverse views on the use of funds generated from divestment.

The major advantages perceived are:

• Public investment in PSU's would make them more accountable, thereby increasing profitabilty and resource mobilisation.
• The proceeds of divestment could be used to improve urban/ rural infrastructure.
• Govt. protection for its labour force is a hindrance in improving productivity of labour.

On the other hand, the disadvantages of Divestment are:

• The proceeds may be used to fund fiscal deficit, leading to overspending by Govt. on unproductive purposes.
• Profit making PSU's are the highest dividend payers to the Govt., thus a stake sale in them could dent Govt.'s ability to generate huge cash flows in the future.

The endless debate continues. It would be in the interest of the nation if disinvestment is pursued selectively, with the objective of improving productivity of PSU's, to bring them at par with the Private sector enterprises thus creating a healthy competitive environment.

Budget Analysis IV: Impact on Markets

The presentation of the Union Budget is a widely anticipated event for the markets. The markets seem to have given a thumbs down to the FM.

Equity Markets: Both BSE Sensex and the Nifty have shed 9.5% each in the first week after presentation of the Union Budget. In fact the Sensex recorded its largest ever loss in terms of points on the budget day. A deeper analysis reveals that the budget is not bad for the markets overall, but as the traders and speculators had built large positions ahead of the presentation of budget, the knee jerk reaction resulted in unwinding of those positions. Negative global cues also did not help matters in any way. It may be outrageous to put the blame on the Budget for the downfall. In fact the budget seems to be very positive for the long term growth of company profits by stimulating demand for their products. The high fiscal deficit of 6.8% of GDP is definitely a matter of concern for the FII's, as it has the potential to put pressure on the Rupee and the Interest rate scenario.

Bond Markets: Yields on bonds have moved up in the backdrop of huge Govt. borrowing programme to fund the expenditure of the Govt. The yield on benchmark 10 year Gilt bond ended the week higher at 6.97% as compared to 6.83% at the beginning of the week. Yields on corporate bonds have also witnessed an upward bias.

Future of Stock Market: The equity indices are close to the levels expected by me 13000 on the Sensex and 3900 on the Nifty. One cannot rule out a further decline of 5% or so from these levels, but equity investments have turned fairly attractive at these levels from the long term bull market point of view. I have a gut feeling that some new sectors will lead the next bull run. These sectors could be:

• Hospitality & Tourism: Considering the huge shortage of rooms in view of the forthcoming Commonwealth games 2010, and India gaining its rightful place in World tourism, this sector could be a fruntrunner in case of an early turnaround in the global economy.
• Media & Entertainment: This beaten down sector has all the portents of a spectacular bounce back, in the second half of FY 2009-10, when the world economy recovers from recession.
• Power & Energy (Specially non-conventional energy): Non-conventional energy such as Solar Power & Wind energy, as also Bio-diesel will be much sought after once Crude oil resumes its upward march.
• Domestic Retail: With real estate prices/rentals falling to reasonable levels, organised retail and consumer durable companies are in for good times. We are likely to see huge investments in organised retail in the coming months.

One can selectively invest into companies from the above sectors to ride the next bull run.

Budget Analysis III: Taxation Measures

Goverments the World over have to raise resources to fund various social security schemes such as poverty allieviation schemes and provision of social infrastructure, and to fund the cost of running the Govt. This purpose can be accomplished through Govt. borrowing or through the measures of Taxation. Taxation is also aimed at equitable distribution of wealth, by taking money from the priviledged class for distribution amongst the less priviledged. India's Gross tax revenue is slated to grow at a slower pace this year, leading to a decline in the Tax/ GDP ratio from 11.5% in 2008-09 t0 10.9% in 2009-10.

Sources of Government's tax revenue can be broadly classified into Direct taxes (Income tax, Wealth tax, Corporate tax etc.) and Indirect taxes (Customs and Excise duties, Service tax). The share of direct taxes is steadily on the increase, budget 2009-10 projects the share of direct taxes at 58% of the total tax collection. According to budget estimates for 2009-10, the direct tax proposals are revenue neutral whereas the Indirect tax proposals would bring in an additional Rs.2000 crores. Let us sum up the impact of current year Tax proposals:

Individual Taxation:

• Basic tax exemption limit raised by Rs.15000 for Senior citizens and Rs.10000 for others.
• 10% surcharge applicable on income above Rs.10,00,000 abolished
• Fringe benefit Tax (FBT) payable by employers abolished. Perquisites to be taxed at the marginal rate of tax in the hands of employees
• Allowance for medical treatment of a dependent with severe disability increased from Rs.75000 to Rs. 1 lac (Section 80DD)
• Deduction for interest on loans for higher education widened to cover all fields of studies after completion of schooling (Section 80E)
• Wealth tax exemption limit raised from Rs.15 lacs to Rs.30 lacs.

Corporate Taxation:

• Minimum Alternate Tax (MAT) on book profits increased from 10% to 15%
• New Pension Scheme (NPS): Income of NPS trust exempted from income tax, DDT and STT.
• Commodity Transaction tax (CTT) abolished
• Easy presumptive tax for small businesses upto turnover of Rs.40 lacs at 8%.

Indirect Taxes: As a result of changes in indirect tax rates LCD TVs, Luxury cars, Branded jewellery and essential drugs become cheaper, whereas Set-top boxes, cotton apparel and branded fuel become dearer. Law firms brought under the purview of service tax.

Budget Analysis II: Beneficiaries of Govt. Spending

Govt. spending in Budget 2009-10 is slated to go up by one third to a record Rs.10.2 trillion. The proposed increase in budgetary allocation will accelerate growth of the economy. Some of the important expenditure side allocations are:

• Jawaharlal Nehru National Urban Renewal Mission (JNNURM): Allocation is Rs.12887 cr. (higher by 87% over last year)
• Target for agricultural credit flow is fixed at Rs.325,000 cr (up 15% from last year). Interest subvention scheme for small crop loans continued, an additional 1% subvention is proposed for timely payment of crop loans.
• National Rural Employment Guarantee Scheme (NREGS): Allocation is Rs.39100 cr. (higher by 144% over last year)
• Bharat Nirman: The outlay under six schemes covering Bharat Nirman has been increased by 45% over last year.
• Infrastructure financing: IIFCL will evolve a takeout financing scheme to enhance availability of long term funds and to refinance PPP projects.
• Interest relief for Export credit extended by six months upto 31st March 2010.
• Streamlining subsidies: Move to a system of direct transfer of fertiliser subsidy to farmers and introduction of a nutrient based subsidy scheme to ensure balanced use of fertilisers. Oil subsidies to be guided by a revised formula (to be announced later) to protect the upstream oil companies.
• The budget for Highway development and Railways has been stepped up by 23% and 46% respectively.

These and other steps outlined in the budget will ensure higher spending to boost demand and will result in restoring higher growth in GDP in the coming years. The focus of this budget has been to reduce the gap between the rural and urban India. Companies focusing on demand generation from rural India are likely to benefit the most from the increased allocations in budget 2009-10. The spoiler in the party, however, could be the deficient Monsoon rains.

Budget Analysis I: Understanding Deficits

In a series of write-ups starting today, I would try to unravel the mystery behind the 'Union Budget', the fiscal document of Indian Government. At the outset, let us try to understand the nature of deficits: Budget Deficit is a common economic phenomenon, that occurs when the spending of a government exceeds its financial savings. Deficit differs from debt, which is an accumulation of yearly deficits. Famous economist John Maynard Keynes believed that deficits help countries climb out of economic recession. The first budget under the new UPA regime is a 'borrow and spend budget' attempted to spur economic growth.

To counter the global slowdown, the govt. provided three fiscal stimulus packages during the last fiscal (FY 2008-09), which has lead to the fiscal deficit for FY 2008-09 ballooning to 6.2% of our GDP. The level of govt. spending budgeted for FY 2009-10 is Rs.10.2 trillion, up 36% from 2008-09, directed largely towards funding social sector programmes. This will result in a huge spike in Govt. borrowings or fiscal deficit which is projected at 6.8% of GDP in FY 2009-10, a level never seen since 1991. The higher borrowings will lead to interest payments climbing up to 20% of total govt. spending. The FM has taken a big gamble, and he may be playing with fire, unless economic growth is perked up soon. Although the FM has categorically sated that fiscal deficit will be reigned in below 4% within the next 2 fiscals, it will be a test of govt.'s fiscal prudence.

The Govt. will have to tread carefully, as the higher Govt. borrowing may crowd out private investment, leading to a pressure on inflation and push the interest rates higher which will be a roadblock for faster economic growth. It may also result in lowering India's sovereign rating by international rating agencies. The budget aims at restoring higher consumer spending and corporate investments. In his budget speech FM has outlined 3 major challenges for the economy:

• To lead the economy back to the GDP growth rate of 9% pa at the earliest
• Deepen and broaden the agenda for inclusive development
• To re-energise the government and improve delivery mechanisms

The FM has sacrificed short term gains/measures for the sake of long term growth. It is a consumption lead, growth oriented budget and we wish the FM success in his endeavours.

Return of the big 'Bull Run'

A 'Bull Market' can be defined as a prolonged period in which investment prices rise faster than their historical average. Bull markets are a result of economic prosperity/ economic boom or investor psychology, or a mixture of both. Bull markets are typically characterized by general optimism, investor confidence and expectations of strong results by companies. Long term investors pray for continuation of the bull run. Equity markets of the world have had two distinct bull markets in the recent past: The bull market of 90's lead by technology stocks, which ended with the dot com bubble; and the bull market of 2007-08 lead by commodity stocks,which ended with the sub-prime crises and recession. Looking at the spectacular rise in equity indices since their mid March '09 lows, the question foremost in every body's mind today is: has the Bull market returned for Indian equities?

I for one hold a strong view that worst is over for the Indian equity market, and we are fairly close to the start of a spectacular 'Bull Run'. The reasons for my conviction are many:

• Economic Growth in India, lead by the domestic consumption, continues to be robust. World Bank has upgraded India's growth prospects for 2010, some economists have forecast Indian economy to overtake the growth of China's GDP next year.
• The installation of a stable Govt. at the centre has been responsible for revival of 'Investment appetite' in India. According to Nasdaq Equities Magazine article political changes are one of the three biggest causes of Super Bulls and Super Bears.
• According to technical trends 'Fibonacci analysis and Elliot wave theory', the last bull run in India lasted 57 months (from April '03 to January '08), hence the current bear phase should last around 19 months, or around August '09. This would be the time for revival of the next secular bull market.
• Soft interest rate scenario and lower inflation auger well for the start of the next bull run, as the returns from fixed income securities is continuously on decline. The money waiting on the sidelines will thus flow to equity investments.
• With the pension sector reforms, and the launch of 'New Pension Scheme' from 1st May 2009, close to Rs.1,00,000 cr. is likely to be invested through this scheme, a fair chunk of this money will find its way to the equity markets.
• Relative stability/strength of the Rupee vis-a-vis the US Dollar augers well for the flow of FII money into Indian equities. The revival of PE (Private equity) investments is also positive for Indian markets.
• The recession in World Economy has reached its peak, and economic revival is expected to start from the last quarter of 2009. This will restore stability to the fortunes of global businesses of Indian companies.
• The strong rural demand will give a big push to Indian domestic companies. The stimulus packages announced by the Govt./ to be carried forward through the budget will have a positive effect on the demand.

Coming to the fair value of our markets, I would like to stick to the basics: The historic PE multiple for Indian markets has been around 15. At 15000 BSE Sensex, our markets are fairly valued at 15 times forward PE, or 17-18 times trailing PE. For small investors, it is advisable to wait for an entry at lower levels (around 13000 on the Sensex, or 3900 on the Nifty). If the markets turn euphoric post budget, it would be prudent to book some profits above 16000 on the Sensex.

Understanding the 'BETA'

Investment in equities is marked by higher risk as compared to investment in debt or fixed income securities. Capital Asset Pricing Model (CAPM) describes the relationship between risk and the expected return on an investment. The investor needs to be compensated for the time value of money and the additional risk undertaken for investing in a risky security. The CAPM says that the expected return of a security or a portfolio equals the rate on a risk-free security plus a risk premium.

Beta is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. The beta of an index measures the average volatility of the stocks comprising the index and is always equal to 1. A beta of less than 1 denotes that the security will be less volatile than the market and a beta of greater than 1 denotes that the security's price will be more volatile than the market. Stocks having a higher beta have the potential to give higher returns but they also carry a higher risk.

Analysis of 'Nifty' Stocks:

Past 12 month data of Nifty (May 2008- April 2009) reveals that the following stocks had the highest beta: Reliance Infra (1.81), Unitech (1.68), ICICI Bank (1.64), Suzlon (1.62), DLF (1.59), Reliance Capital (1.59), RCom (1.51). On the other hand stocks having the lowest beta are: Sun Pharma (0.28), Hero Honda (0.36), HUL (0.43), BPCL (0.49), ITC (0.50), CIPLA (0.52), Infosys (0.69). Traditionally, stocks with high beta, also known as momentum stocks, have given exceptional returns during bull markets. On the contrary low beta stocks, also known as defensive stocks, have given respectful returns during bear markets. One can take an investment decision by identifying the phase of the market and choosing the stocks accordingly.

Transparency in MF Investments

With a view to enforce transparency in Mutual Fund transactions, SEBI vide their order dated 18th June 2009 has proposed as under:

"There shall be no entry load for the schemes, existing or new, of a Mutual Fund. The upfront commission to distributors shall be paid by the investor to the distributor directly. The distributors shall disclose the commission, trail or otherwise, received by them for different schemes/ mutual funds which they are distributing or advising the investors."

This ruling is going to have far reaching consequences for MF investments in India. While the distributors are up in arms against the SEBI order, retail investors are confused about its impact on their pocket. Let us try to understand the impact of this order:

• Indian Investors are largely dependent upon distributors for their investment needs. Last year SEBI had allowed investors the benefit of 'No entry load' for direct investments through the fund houses. Despite this benefit, less than 5% MF investments have been routed through the direct route. The apprehension of distributors losing out on business is thus quite unfounded.
• Another apprehension is that investors may not be matured enough to understand the meaning of upfront fee. The relationship between the investor and the advisor is based on trust, and as long as the trust is maintained it may not be difficult to charge an upfront fee, like the brokerage in the case of equity investment. However, it will put the onus of record keeping of the commission earned on the distributor.
• The level of advice to the investor may suffer, as the distributor may be inclined to sell MF schemes of large fund houses offering him higher 'trail commission'. But since disclosure of trail commission is also being made mandatory, the investor can decide after taking a view.
• Initially, schemes like ULIP may score over MF schemes, as distributors continue to get higher commissions on these schemes. There is an urgent need to allow a level playing field by improving transparency of ULIP schemes, which fall under the purview of the insurance regulator (IRDA).

The SEBI move is likely to benefit all the market participants in the long run, after the initial hiccups. However, the need for investor education at this stage is very high, to enable the investor to understand the implication of the recent changes, and to ensure movement to the new regime in a smooth manner.

Indian Stock Markets and 'Budget Blues'

Presentation of the Annual Budget, the fiscal document of the Central Govt., forms a very significant event for the Indian Stock Market. Ever since the Government of India embarked upon the liberalisation process in 1991, this annual event has become all the more important for the market participants. This year this historic event is going to fall on Monday the 6th July 2009. Historically stock markets have given a negative return post budget (returns for one month after budget announcement) in 14 of the 18 years since 1991. Will the markets be able to break the post budget jinx in 2009?

Fortunately, the markets have entered a new orbit with the installation of a stable Govt. at the Centre, so a significant downward risk is almost ruled out post budget. The initial pre-budget euphoria has almost peaked out at around 15600 on the Sensex and 4700 on the Nifty. At the moment markets are not expecting too much from the budget, given the limited options available with the Finance Minister. If the markets witness a reasonable correction in the run up to the budget, it will be good for the long term health of the markets, since the valuations seem stretched at these levels. The events that could cast a negative shadow over the markets in the short term are: Spread of the 'Swine Flu' epidemic and the unsatisfactory advance of 'Monsoon' during the month of June. These events have the potential to pull down the indices substantially (Sensex to around 13000 and Nifty to under 4000).

If the pre-Budget fall materialises, it will be a good buying opportunity for long term investors. The Budget is likely to spring some positive surprises, and if that happens markets can break the post-Budget jinx and head higher towards Sensex levels of 16000 and above. But the gains post budget will be selective and not across the Board. One can take calls on individual sectors after analysing the budget impact.

Economic Recovery as seen by G8

The Group of 8 (G8) is a body of World's Top 8 industrialised nations. The G8 Summit was formed in the year 1975 by eight member nations: Russia, USA, UK, Japan, Germany, France, Italy & Canada. The European Union (EU) is its 9th member. The G8 Finance Ministers recently met at Lecce (Italy) to review the progress of global economic recovery. The view expressed by them is: "The global economic outlook is improving but the situation remains uncertain, and unemployment may continue to increase even after the growth begins picking up". The concluding statement made by G8 FMs is: "We are in the middle of the worst crises since the Great Depression".

Although the Group supported the government action in the wake of the financial crises, it noted that the stimulus must be consistent with the price stability and medium term fiscal sustainability. In view of the stimulus packages being detrimental to public debt putting inflationary pressure on the economies, several ministers felt it was time to scale back government action. The "Lecce framework" agreed to strengthen corporate governance, market integrity, financial supervision, and transparency of macroeconomic policy. The undercurrent of the Lecce summit was the concern about inflationary pressures and continued unemployment. These issues will be presented at the extended G20 meeting scheduled to be held at Pittsburgh, USA in September '09.

Principles of Value Investing: Margin of Safety

Timing the Equity Markets is a very tricky issue: otherwise how would one explain a near 100% gain in Sensex and Nifty levels from their March 2009 lows. Understanding the principles of 'Value Investing' propounded by Benjamin Graham and Warren Buffet will help investors earn a decent profit on their equity investments, despite the volatility on the markets. One of the underlying principles of Value Investing is 'Margin of Safety'.

In simple terms Margin of Safety (safety margin) is the difference between the intrinsic value of a stock as compared to its market price. The term margin of safety was coined by Benjamin Graham & David Dodd in their seminal 1934 book, Security Analysis. Using margin of safety, one should buy a stock when it is worth more than its price on the market. This is the central thesis of value investing philosophy which espouses preservation of capital as its first rule of investing. Benjamin Graham suggested to look at unpopular neglected companies with low P/E (Price to Earnings) and P/B (Price to Book Value) ratios. As fair value is difficult to accurately compute, the margin of safety gives the investor room for error, and protects the investor from both poor decisions and downturns in the market.

Valuation is the process of determining the current worth of an asset or company. There are many techniques that can be used to determine value, some are subjective and others are objective. An analyst valuing a company may look at the company's management, the composition of its capital structure, prospect of future earnings, and market value of its assets. Benjamin Graham defines "Margin of Safety" as the price at which a share investment can be bought with minimal downside risk. This concept is very important for investors, as value investing can provide substantial profits once the market inevitably re-evaluates the stock and its price moves closer to fair value. It also provides protection on the downside if things don't work out as planned and the business falters.

Analysing the current global scenario, nothing has changed so dramatically between March 09 and June 09 to warrant such euphoria on the markets. Some stocks have gone past their intrinsic value and do not merit investment at current levels, rather it would be worthwhile to book some profits at these levels.

General Motors Bankruptcy: End of an Era

General Motors Corp.(GM), once one of the biggest and the most profitable companies in the US, has finally filed for bankruptcy under Chapter 11. Chapter 11 is a chapter of the United States Bankruptcy Code, which permits reorganization under the bankruptcy laws of the United States. Founded in 1908 by William C. Durant, it was initially set up as a holding company to acquire businesses of other auto makers. It went past Ford Motor Co. as the World's largest automaker in 1932, a position it held on for close to 76 years. Faced with stiff competition from Japanese car makers like 'Toyota' and 'Honda' in the late 80's, GM started offering heavy discounts to its dealers to push sales. However, it lost out to the competition on fuel efficiency parameters. GM reported a loss of US$ 8.6 billion in 2005, and since then it has been a downhill story for the once prized company. The recession of 2008 was the last nail in its coffin.

The bankruptcy is likely to lead to major changes and job cuts at the battered automaker. But President Obama and GM CEO Fritz Henderson both promised that a more viable GM will emerge from bankruptcy. The US Federal Govt. will pump in funds to the tune of US$ 50 billion to fund its operations during re-organisation. GM will ultimately become a state owned company with 60% Govt. stake, a victim of 'Laissez Faire' capitalism. The re-organisation will result in closing down Brands and dealership and cutting fresh jobs in excess of 100,000. Owners of current GM shares, which closed at under $1 a share on Friday, will have their investments essentially wiped out. According to GM's bankruptcy filing , the company has assets of $82.3 billion, and liabilities of $172.8 billion. That would make GM the fourth largest U.S. bankruptcy on record. The company that lost the global sales title to Toyota last year, is likely to slip further.