Stay away from 'Operator driven stocks'

As the year 2010 draws to a close, our stock markets are gaining strength, and are likely to test the previous highs in the next couple of weeks. But, there is a word of caution for the retail investors not to be carried away by the euphoria, and desist from investing in 'operator driven stocks' based on hearsay. Some investors may have been lucky to have made money in these stocks provided they offloaded them in the last bull run, but most investors have burnt their fingers by investing in these stocks. SEBI has cracked its whip on the activities of these operators a.k.a manipulators on several occasions, but their activities are not fully curbed. The last leg of the bull run is best used by these operators to jack up the prices of their favourite stocks. This month SEBI order pulled up the promoters of companies like Welspun Corp., Murli Industries, Ackruti city, and Brushman India for allegedly rigging the stocks of their companies in collusion with some dubious operators.

How does one identify an 'Operator driven stock':

• Sharp price movements in both directions - These stocks generally swing between locking consistent upper circuits to getting frozen at lower circuits. It is very difficult to get out if you have purchased the stock at a higher level.
• Small market cap. - This enables the operators to manipulate the price with limited funds deployed. The penny stocks are often recommended by unscrupulous publications through SMS and mails, as the cost of the same is low. This helps in creating volumes in these stocks.
• High PE multiples - These stocks often quote at very ridiculous PE multiples, which are often justified by the news flow regarding order book of the company, although the company may lack the execution capability. Investors must check the PE multiple of the industry, small cap stocks normally would not sustain a higher PE multiple as compared to the industry leaders.
• New listings - During the bull run some dubious companies are able to demand high premiums for their IPOs which are manipulated in the early days of listing. More than 50% of the companies that came out with new issues during 2010 are quoting at heavy discount to their offer price.

It is not going to be easy to make money on the equity markets in 2011. Retail investors are advised to stick to large cap stocks with good track record of performance and reliable managements. Investment in mid and small cap stocks are advisable only after thorough research, keeping in view the above factors.

Revolution in Insurance industry: Buying insurance through Demat account

Soon insurance policies shall be available online through demat accounts. This is likely to revolutionise the entire insurance industry. A 12-member committee of the Life Insurance Council constituted to look into this issue is expected to submit its recommendations to IRDA next month, according to S.B. Mathur, the council’s secretary general.

A number of customers buy insurance without knowing enough about the commissions paid and terms of risk cover, leading to mis-selling, a phenomenon that has led to an unnaturally high rate of lapsed policies. One of the key benefits of a demat form for insurance will be the ready disclosure of all policy-related information, including commissions and fees paid to the company, exact benefits offered, premium payment and renewal-related dates, and terms and conditions of risks covered. The acceptance of these recommendations by IRDA would serve as a great service to the large number of policy holders, and would make the cost of an insurance policy attractive. This will also help the insurance industry tap the latent demand for insurance by the price conscious customers who are deterred from taking out a policy due to the lack of transparency surrounding the insurance policies sold, or rather mis-sold by the insurance agents/ advisers.

The other notable advantages of the insurance in demat form are:

• Implementation of Know Your Customer (KYC) and Anti- money laundering guidelines would become easy and transparent
• The administrative cost for insurance companies shall be cut down drastically
• Customers shall have the advantage of single point transaction for insurance
• Helping further expansion of the insurance industry.

Hopefully the procedural changes shall be in place for the new system within one month. The first quarter of next calender year should see this welcome transition, which is a big step forward by IRDA, after the abolition of entry load on Mutual fund schemes implemented by SEBI last year.

Is the Bull run over for equity markets?

Continuing from my last post on behavioral finance, the recent fall in the equity markets confirms the fickleness of human mind, when it comes to taking decision about our finances. Retail investors who were all gung-ho on the markets around Diwali, are now panicking and asking the question whether bull run is over on the markets? To answer this question I shall rely on the three different approaches to analyse the future of the markets:

• Fundamental Analysis: We all knew around Diwali that the markets were over stretched on fundamentals, and excess liquidity was driving the momentum stocks. So once the liquidity crunch was observed, after the unearthing of a series of scams, the momentum stocks in the realty and infra sectors were the worst performers. These stocks were beaten down to such ridiculous levels that quite a few of them are looking attractive at current levels. The positive GDP numbers announced today are pointing to the fact that the worst is over for the markets from the fundamental point of view, at least for now. The markets can expect some positive news flow from the international markets also in the days to come.
• Technical Analysis: The unabated run of our equity markets from the Nifty level of 4800 to 6300 did call for a technical correction. The markets have retraced around 40% of the above rise, which is close to the 38.2% retracement level held sacred by technical analysts. The bounce back on the markets was widely anticipated from the 5700 levels on the Nifty, and the markets have obliged. Given the oversold position of the markets the bounce back could be ferocious. The beaten down sectors shall be at the fore front of the rally. The technical correction seen by the markets is good for the long term health of the markets. 
• Astro Analysis: While analysing the markets I would like to give equal weight age to the astrological angle as the other two factors. Human behaviour is determined by the confluence of planetary configurations, and stock market behavior is no exception. As I am no expert in this area I would like to quote what the famous astrologer Lachman Das Madan had said in October: "Within a period of about one month from 6th November 2010 financial institutions, members of security forces, business people, diplomats, youth, sports people etc. are likely to be accused of corruption and illegal activities and actions are likely to be initiated against them". You can analyse the correctness of this astro prediction. The unearthing of scams one after another was influenced by the planetary configurations. The malefic affect of the planets now seems to be diminishing, hence we can soon expect business as usual in the markets.

In view of the above I would like to conclude that the Nifty and Sensex are likely to surpass their previous highs of 6300 and 21000 respectively by the year end. How much beyond these levels can the markets rise will largely depend on the liquidity flows. It seems that Christmas festivities have begun with the positive flow of economic data, India reporting 8.9% GDP growth in 2nd quarter. But this does not mean that the bad news is fully discounted by the markets. Behavioral finance tells us that human beings are in a state of denial to bad news when it first strikes, but gradually tend to accept it over a period of time. The bad news like the follow up on 2G scam and the Bank bribery scam will again come to haunt the markets around Budget time in February 2011. Coupled with bad news on economic recovery, or the lack of it, from European markets may spell doom for the markets again. The downward movement at that time could take the markets back to the sub 5500 levels on the Nifty again. This does not mean that the bull market is over, it only is a pointer to the fact that investors should keep booking partial profits whenever markets provide that opportunity.

Behavioural Finance: Investors do react to newsflow

The recent correction in the stock market has send shock waves down the spine of retail investors. Many of them who have entered the markets at higher levels are frantically calling their brokers/ advisers on the future course of action. This behaviour can be explained by understanding the concept of 'Behavioral Finance'. Behavioral Finance, is a study of investor market behavior that derives from psychological principles of decision making to explain why people buy or sell the stocks they do. Behavioral finance places an emphasis upon investor behaviour leading to various market anomalies.

Contrary to popular belief, studies reveal that  investors perceive bad news as less credible (i.e., are more optimistically biased) than good-news management forecasts and discount bad news accordingly. For this particular reason, investors remain in a denial mode in discounting the bad news in respect of the stocks that they hold. Behavioral finance tells us that most investors are most vulnerable to losing their principal investment, and thus continue to hold onto a particular stock, more so when adverse conditions have pushed the stock price below their purchase price. They are always hopeful that the market would reverse sooner than later, and they will recover their original cost. This behavior is also the stepping stone of 'Technical analysis', taking into account the support zones of stock prices.

But the bad news is discounted by the investors/ markets, albeit with a time lag. What we are witnessing now is the reaction of the investors to all the accumulated bad news. In the recent bull run that continued till Diwali, investors continued to ignore both international and national bad news when it unfolded initially. The Greek debt crisis and the slowdown of industrial production in India, were initially shrugged aside and the markets continued their upward march unabated. It took the unfolding of the political scams in India to put brakes on the markets. It is fortunate for the investors that the much awaited correction has started, which gives an opportunity for investors to re-enter the markets at lower levels. Await some more bad news to get discounted, before committing large funds into the equity markets. A 10-12% correction from the recent highs will be good for the long term health of equity markets.

Samvat 2067: The charge of the 'Bull'

We are in Samvat 2067 of the Indian calender which commenced on 16th March 2010. However, stock market traders view Diwali as the start of the new Samvat. Diwali is the time to review the performance of the stock market for the past one year. The year gone by has been an eventful year for the stock markets, and the new Samvat 2067 has commenced on a positive note with the BSE Sensex scaling a new closing high of 21004 at the close of the 'Muhurat' trading on 5th November. Before we proceed to analyse the year ahead, I would like to recall my observations on Samvat 2066, put up on my blog on October 18 2009, under the caption: 'Samvat 2066: Return of the Bull Run!'. I had written: 

• 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.
• The growth in profits during 2010-11 will ensure that valuations become attractive in the second half of FY 2010-11
• 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.

However, I must admit that I was hopeful of a 5-10% correction during the middle of the year which never occurred, leading to a sustained bull run to the previous highs of 21000 on the Sensex (6300 on Nifty), achieved on Diwali day. Now for the crystal gazing for 'Samvat 2067':

• I would like to re-iterate that the 'Mother of Bull Runs' is on. 
• Technically, supported by the massive liquidity overhang, the markets are still in an uptrend. A strong base seems to have been created around the 5600 levels on the Nifty, which should hold as the base in the next correction, whenever it occurs.
• Fundamentally, the performance of companies has been reasonably good. The stretched valuations at this juncture would seem justified if inflation is tamed by the end of FY 10-11.
• Astrologically, according to eminent astrologer Bejan Daruwalla, Samvat 2067 will be excellent for the Indian economy and our markets. Barring a downturn from January 2011- May 2011, markets will be in the grip of bulls.

Considering the above facts, most market analysts are hopeful of Nifty scaling 7000 levels by next Diwali, which is a reasonable expectation. I am sanguine that this target is likely to be achieved by next Diwali. But given the risk-reward ratio for equity investment, a 10-11% yearly return is not the risk worth taking. Therefore, new investments should be undertaken only after a 5-10% correction from the current levels. The second important factor for taking advantage of the next up move in the markets would be the identification of right sectors. My sector bets for Samvat 2067 would be: Tourism & Hotels, Aviation, Auto motives, Paper products, Media & Entertainment, Health care.

Wishing you all a Happy Diwali and Happy Samvat 2067.

The return of the 'Bond'

The retail bond/ debenture market was flourishing in the 90's with several top companies coming out with debentures in the form of Non convertible debentures (NCDs), Fully convertible debentures (FCDs) or Partly convertible debentures (PCDs). The non convertible portion was separately listed on the stock exchanges and there was a fair amount of trading in these debentures. But with the opening up of the economy, the companies had more options to raise debt in overseas market, leading to a virtual stagnation in the retail bond market.

 In Budget 2010, the government introduced a new section 80CCF under the income tax act to provide for income tax deductions for subscription in long-term Infrastructure Bonds. These bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE. Infrastructure bonds help in inter mediating the retail investor's savings into infrastructure sector directly.

Two issues of infrastructure bonds were recently launched to tap the retail segment: IDFC and L&T infrastructure bonds. These bonds offer an attractive option to fixed income investors looking for safety and tax saving. These bonds are expected to generate higher returns as compared to bank deposits and post office schemes. These bonds offer 7.5-8% annual returns, alogwith tax saving. These bonds may not appeal to investors in the lower tax bracket as they would be saving only 10.3% in taxes. However, investors in the highest tax bracket will be saving 30.9% on taxes which amounts to a decent Rs.6,180 savings on an investment of Rs.20,000. those with a long term perspective can choose to invest in these 10 year bonds, which have a lock in period of 5 years.The IDFC issue has closed while the L&T bond issue is open till 2nd November 2010. Even if you miss out on the issue this time there is no need to bother, there will be a spate of such issues towards the close of the financial year.

The salient features of the infrastructure bonds are listed below:

1.The bonds don't attract any TDS, however the interest receivable is subject to tax.

2.The interest accrued on the bonds will be credited to the respective bank registered with the demat account through ECS on the due date for interest payment.

3.The bonds will be listed on NSE and BSE and can be traded after the 5 year lock-in period.

4.Investors can mortgage or pledge these bonds to avail loans after the lock-in period.

5.An investor would need a demat account and pan card to invest in these bonds.(physical form is also allowed).

6.The bonds will be issued only to Resident Indian individuals (major) and HUF.

The Micro Finance Muddle

A spate of suicides in Andhra Pradesh, which accounts for over a third of the micro finance business in India, has seen the state government pass stringent regulations to control these institutions. The micro finance institutions (MFIs) have played an important role in fulfilling the credit requirements of the rural folk, who have limited access to organised bank finance even today. Most MFIs started as service oriented NGOs but have assumed a commercial role over a period of time.

While the Reserve Bank of India is eager to get credit to the poor and encourages banks to lend to microfinance institutions, it has not permitted them to raise deposits. Indian microfinance lenders generally charge between 24 percent and 36 percent annual interest. It is more or less on the lines of the interest rates charged by unorganised money lenders or the more sophisticated credit card companies. Banks have their own interest in extending credit to MFIs, to fulfill their agricultural lending targets.

Questions are now being raised about the functioning of MFIs. Some analysts also compare the MFI story to the sub prime crises in the US. RBI has also started an enquiry into the affairs of MFIs on a selective basis. There is definitely a need to regulate the MFIs, without killing the model that they adopt. The problem area could be multiple financing in certain pockets which could escalate into a bubble. But we must not forget that these institutions by and large enjoy an excellent recovery rate of 95-100%. The regulators will have to segregate the hay from the chef, rather than cast a shadow on the functioning of the entire MFI sector.

Looking at insurance beyond Tax saving

The underlying concept of insurance is "Insurance is a subject matter of the solicitation", which means that the client or the person proposed to be covered by the insurance cover should seek insurance from the insurance company. But the irony is that insurance is not solicited in our country, but it is sold or rather 'mis sold' in the garb of certain benefits which are sometimes beyond the basic purpose of insurance, that is to safe guard the interest of the survivors or in other words the near and dear ones of the person seeking insurance. The advent of ULIPs had unleashed the beast of rampant mis-selling by the insurance advisers. Thankfully, better sense has prevailed of late and the regulators have come out with stringent norms of disclosure for ULIPs effective September 1, 2010.

Many people still buy insurance primarily to take advantage of the tax gains associated with it. There is no harm in saving a little of your taxes, but the primary purpose of insurance should not be missed. The tax breaks available on an insurance product should merely be seen as add-ons or sweeteners. With the application of the new direct Tax code from 01.04.2012, there are going to be some significant changes on the tax implications of insurance products. Here are the important changes proposed:

• Under DTC the deductions applicable to insurance products (currently defined under section 80C) will be over and above the limit of Rs. 1,00,000, to the extent of Rs.50,000. However, the deduction shall be available only to those insurance policies where the premium does not exceed 5% of the capital sum assured in any year.
• Insurance proceeds shall continue to be governed by EEE (Exempt-Exempt-Exempt) system of taxation, as contributions, accretions and withdrawals under a life insurance policy continue to be tax exempt.
• The maturity proceeds of life insurance policies become taxable, other than in case of death of the policy holder, if the premium paid exceeds 5% of the sum assured. In other cases the insurer company will be subject to dividend distribution tax, which will be deducted from the proceeds of the policy.
• Insurance companies will be subject to normal rates of corporate tax stipulated at 30%, instead of the 12.5% concessional tax paid by them currently. this is likely to increase the cost of insurance for the clients.

All said and done, insurance cover should be seen in the context of the need for insurance, which is based on the security and safety of the dependents in the event of pre mature demise of the individual, rather than the tax breaks associated with the insurance policy.

Ganesha Smiles: It's time to bid farewell!

Ganesha is smiling on the equity markets, but sadly it's also the time to bid farewell. The BSE Sensex is on the threshold of Mt.21000 again after a gap of 32 months. Bulls have been on the rampage for the last couple of sessions, but just like all festivities must come to an end one day, the dream run on the markets is also nearing an end for this season. Retail investors are advised to exercise extreme caution at this juncture, and refrain from putting fresh funds in the markets. It may not be a bad idea to book some profits. However, long term investors should continue to invest in Mutual funds through the SIP route.

The question nagging the market pundits is whether we have moved into a bubble zone? Let us try to find an answer to it. A bubble is defined as "Something that lacks firmness, solidity or reality." The bubble isn’t bad at all, that’s when prices inflate and living is good. As most economists will tell you, it’s the bursting of the bubble that markets should worry about. Forming of 'bubble zones' is not new to the markets,  as markets are not expected to trade on fair valuations all the times. “When people start using phrases like ‘this time it’s different, or we have a new paradigm, or I better buy now or I won’t be able to afford it,’ then you know you’re in trouble,” says economist Will Dunning. Investors should be able to see the writing on the wall.

• 
  
  There is a clear disconnect with the fundamentals. The PE multiple for the markets at 23-24 has moved into troubled zone. What is worrying about the current rally is that the PE of small cap index has also inched towards the 20 mark.
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  The rally is fuelled by FII money, sometimes called hot money. Unfortunately, there are no means to identify the origin of this money. How much of this is speculative investment by hedge funds, is any body's guess.
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  There is also the derivative bubble which threatens to destroy not only the US economy, but has serious repercussions for the developing world.
  The derivatives market is almost entirely unregulated and in recent years it has ballooned to such enormous proportions that it is almost hard to believe. Today, the worldwide derivatives market is approximately 20 times the size of the entire global economy. 
• "It's always better to be safe rather than sorry".

The intention of this piece is not to scare the investors but make them appreciate the impending scenario. 

Equity markets ripe for profit booking!

Consider the fact that BSE Sensex and Nifty have given a return of around 125% over their March 2009 lows. Would you not like to take some money home? Although, as a Financial planner I am not supposed to advocate timing the market, but then it is prudent to suggest partial profit booking. After all investors take the risk for making money on equity markets, and profit booking is a means to realise those gains.

The recent signals emanating from global markets do not instill confidence in the sustained bull run, our markets have to take a breather before they gather enough steam to scale new highs. The global recovery based on stimulus packages seems to have run its course. IMF sees growth slowing down in top 3 economies of the world: USA, China and Japan. The strengthening of the US Dollar and the Japanese Yen, considered as safe havens in a crisis situation, is a pointer in this direction. Foreign institutional investors have started booking profits in some frontier markets such as Vietnam, Pakistan and Ireland. India and China could be next on their radar.

In such a scenario investors are better advised to book profits, especially in the momentum stocks/sectors which have run up too fast in the past few weeks. Investments on declines can be considered in the sectors that have lagged behind in the last bull run. They could be the ones that could help you ride the next bull run. I have an inkling for Telecom (Bharti Airtel) and Oil (Reliance Industries). However fresh investments could be staggered over the next 3-4 months. However investments in Mutual funds through SIP route should be continued religiously, with the option of a top up if the markets dip substantially. Investment in Gold, also on declines, could also be considered as it is likely to pay rich dividends as the demand for gold has been going up steadily without any commensurate increase in supply. 

India set to become World's fastest growing economy

The 'Tiger' is set to overtake the 'Dragon' in the next 3-5 years. If the recent Morgan Stanley report on Global growth is to be believed, India is set to overtake China to become the fastest growing economy in the world by 2013. while India's GDP growth is expected to climb steadily towards 9-9.5% in the period 2012-15, China's growth is expected to cool down to 8% levels by then.

As the death rate and the birth rate are expected to fall in India, it can hope to get the largest addition to the working population during this period, leading to a quantum jump in productive capacity. this is likely to push up the net savings rate which is currently around 35% of GDP. The FDI flows to India in terms of percentage of GDP (3%) has already overtaken that of China in 2009.

However, this scenario can be created only if the government is able to pump in the necessary resources to boost infrastructure development. Another issue would be the ability of the Govt. in handling the internal security issues of naxalism and separatism. The instability on the political front can jeopardise the growth projections, as it leads to critical loss of man days, leading to a dent in production capacities. On the other hand, the Govt. will have to improve the productivity of the agricultural sector to be able to feed its burgeoning work force, and control the run away food prices, which could become the nemesis of the govt.

If indeed India is able to catapult itself at the top of GDP tables, investors in equity markets are in for some bonanza. The period from 2012 onwards should, in all probability, be the golden period for Indian stock markets. Investors are advised to start investing selectively, and wait for any dips in the markets to put in their money into Indian stock markets, to ride the next bull run. But remember, there could be a temporary dip in the markets before the markets cross their previous 2007 highs, be prepared for that eventuality. But the long term bullishness in the markets is surely evident, for all investors to cherish.

First quarter results do not present a rosy picture

Stock markets generally reflect the mood of India Incoporated's quarterly results. A euphoria was built by market participants in anticipation of some extra ordinary first quarter results. With a major chun kof results already announced for the first quarterr of Fiscal 2010-11, there is a fit case for valuations to adjust downwards.

An analysis of the 300 leading companies reveals that although sales have grown strongly at an average of 20%, profits have shown a subdued growth figure of 12% (excluding the loss making oil PSU's). The reasons cited for the sluggish profit growth are pressure on margins due to higher than expected commodity prices, which have pushed up raw material costs. Interest rates are likely to resume their upward march, after declining fo the past one year, in the wake of a series of rate hikes by RBI. This phenamenon is likely to continue for next two quarters putting more pressure on the margins.

The results have been a mixed bag. With a few companies showing excellent growth in profits, it is perhaps a time to churn your portfolio, after analysing the first qurter results, and also giving due weightage to the full year guidance given by these companies. IT and Banking sector stocks have, by and large, returned excellent figures, leading to a run up in thier stock prices. It may be prudent to wait for a while to enable these stocks to cool off, before taking a decision to invest.

The art of profit booking

"Index falls by 200 points on profit booking". Investor's would have come across such headlines in business newspapers quite frequently, and wondered why markets react immediately to profit booking. At the very outset it would be appropriate to understand the meaning of the term "profit booking". Any investment is made with a definitive purpose, and generation of profit is one of the prime motivators for any investment, other than charity. Profit booking refers to the act of realising a profit on any investment through the process of buying/ selling. For a day trader profit booking is done on a day to day basis, whereas for a long term investor it occurs quite infrequently, depending upon the need for urgent funds or on achievement of the target price of a particular security. Profit booking is an art and every investor must learn this art to maximise his returns from the market.

Imagine, an investor telling you that he had invested in 100 shares of company 'A' 20 years ago by spending Rs.1000, and proudly claiming that his investment is worth Rs.5000 today. Assuming an annual inflation rate of 8%, the adjusted value of his investment would be Rs.4660, thus, in real terms his gain has only been Rs. 340 over a period of 20 years. It is definitely not worth taking the risk of equity investment for such a paltry gain. Had this investor booked profit on his investment, and re-entered at a later date he would definitely had made more money. Even the blue chip stocks also give ample opportunity to make substantial gains through profit booking. Of course no one can time the markets, so you cannot always sell at the peak and buy at the bottom. But some amount of profit booking is essential to optimise your gains on the stock market. If you do not know the art of profit booking you need not enter the stock market on your own, do invest through Mutual Funds, because your Fund manager shall improve your returns through profit booking.

Next is the important question when to book profits? Markets follow the time tested principle of valuation, where every stock is valued according to its worth. Though, in the medium term this principle is violated due to excessive speculation in the market. One must book profits when a stock is overvalued due to euphoria and re-enter when it gets undervalued due to poor sentiment. The most important indicator of valuation of a stock is Price to earnings (PE) ratio. Generally a lower PE indicates a time to enter the stock and vice-versa. But all low PE stocks are not the candidates for buying and not all high PE stocks are candidates for selling. Another indicator is the PEG ratio which is nothing but PE/ Growth. If the growth prospects of a stock are high it will have a low PEG ratio, even though PE may be high. This makes an attractive investment opportunity in that stock. An investor should not be wedded to a stock permanently, thus denying himself an opportunity to sell the stock during euphoria. For any dud stock in your portfolio, it is advisable to book a loss as well, and move to a decent growth stock. Booking a loss on your investment is a much more difficult task, because nobody wants a cut in the principal investment amount. But this painful decision making has to be learnt to cut down on prospective losses.

The current status of the equity markets calls for a partial 'profit booking', as our markets are trading at a 2010-11 PE multiple of 17-19 times, which seems overstretched at this juncture. The average returns from the stock markets from the lows of March 2009 have been over 100%, so there is a good amount of profit to be booked. The chances of Indian economy growing at over 8-8.5% are bright, but it will take some time before the stock markets are able to reach their previous highs. The news flow from global markets does not instill enough confidence in the current rally. There is a high probability of the Indian markets correcting anywhere between 10-20% from the current levels, which will offer a great opportunity to re-enter the markets to ride the next bull run.

Economic Revival & Stimulus Packages

In the aftermath of the global economic crisis that gripped the world in 2008-09, global markets have rebounded sharply from their lows tested in the period between October 2008 to March 2009. This has been largely on the back of stimulus packages announced by the various governments, which have helped boost economic activity and create fresh demand. While many Asian countries like India, China have been back on growth track, many parts of Europe are still struggling to overcome the after effects of the crisis. Coinciding with the G20 summit at Toronto, a debate has been sparked off about the appropriate timing of the withdrawal of the stimulus packages.

The BRIC countries (Brazil, Russia, China, India) are in favour of continuation of the stimulus packages, as they fear a fall in their exports to the Euro zone, if the stimulus is withdrawn in haste. They are also opposed to the levying of the proposed tax on bank transactions to pay for the future bailouts. But the German Chancellor has reiterated her resolve to push for the tax, which threatens the existence of the European Union. The financial system of the developed world has proved to be fragile, as most lenders in these countries have escaped unscathed in the midst of a severe crisis. Indian PM Dr. Manmohan Singh has sounded a word of caution against the hasty withdrawal of the stimulus packages; "We have to be conscious that the recovery is still fragile and uneven. New worrying signs have emerged in the euro zone".

India is, however, taking appropriate steps to lower its fiscal deficit in a calibrated manner. The hike in petroleum prices amidst opposition is seen as a step in this direction. The Finance ministry is firm in its resolve to bring down the fiscal deficit to 4.1% of GDP by 2012-13, from the current level of 6.7%. The outcome of the G20 summit shall be watched by market pundits carefully, as the future of risk capital depends a lot on the sustained global recovery. Any set back to the recovery process is likely to put pressure on the equity markets around the world. The signs emerging from the Euro zone do not instill confidence in the equity markets. Investors are, therefore, advised to tread with caution, at least in the immediate short term.

New Listing Norms: Opportunities galore for Investors

The government has notified rules asking all listed companies to ensure minimum public shareholding of 25%. This is likely to increase opportunities available to investors to benefit from steady growth of Indian economy. According to a report by rating firm Crisil Ltd, there are 179 listed companies that have a public shareholding of less than 25% as of today, the prominent amongst them being: NMDC (10%), Nalco (13%), Power Grid Corp (14%), SAIL (14%), NTPC (15%). Some prominent private sector companies like Reliance Power and Wipro also fall in the same catagory.

The new rules said companies could meet the 25% norm in phases, they would have to add 5% every year to public holdings till it reaches 25%. Uniform listing requirements for all companies, including state-owned ones, could trigger a lot of activity in the primary market. The markets could see fresh paper supply over the next 12 months to the tune of  over Rs58,000 crore from BSE 500 companies. The markets should be able to absorb this supply given the current liquidity conditions. But if liquidity conditions turn unfavourable, due to global problems, it could put pressure on the Indain secondary market. Experts believe that an increase in the public holding of stocks typically increases liquidity and helps in better price discovery.

With the June 4  notification of the Securities Contracts (Regulation) (Amendment) Rules, 2010, at least three private sector firms that had initial public offerings last fiscal will have to hit the market again this year. Mahindra Holidays and Resorts India Ltd, DB Corp Ltd and Godrej Properties Ltd all have promoter holdings of 80% or more and will have to go to the market again before March 2011. Real estate firms dominate the list of companies that need to dilute shareholding, the bigger names amongst them are: Puravankara Projects Ltd, Omaxe Ltd and DLF Ltd. It seems to be a good opportunity for investors to increase their stakes in these blue chip companies, provivded the issues are priced attractively. There may be many companies that currently have a lesser public shareholding, choosing to get delisted rather than increasing their public shareholding further, the government would have to spell out the guidelines for their delisting under such circumstances.

First year of UPA II: The clock has turned full circle

Last year in May, UPA II was given the mandate to run our country for the second innings. The markets greeted the new government with a 'thumbs up'. Both the Sensex and the Nifty, that were languishing at lower levels, hit circuit breakers on the eventful day of declaration of election results in 2009. It clearly signalled the end of the bear phase and defined the new range for the markets, with 4500 on the Nifty as the base of this new range. The market after briefly dipping below this level in July 2009 has more or less traded above these crucial levels. There were lot of hopes and aspirations from the new govt. Have these hopes been belied? The clock has turned full circle in the past one year, and the markets are headed closer to the May 2009 levels.

An analysis of the first year report card of UPA II will be important for deciding the future trends of our stock market. The report card is a mixed bag of hits and misses. The biggest challenge before the Govt. last year was to bring the economic growth back on track in the midst of global turmoil. The govt. launched a series of measures to spur demand backed by consumer spending, and has come out with flying colours on the economic front. World bank has also acknowledged this fact, and has now estimated the growth of Indian economy at 8.75% for 2010. The fiscal deficit is a bit of a concern, but the bounty of 3-G spectrum auctions has eased the threat to a large extent. Inflation still continues to be a challenge, and rising oil and gas prices are not going to help matters too soon. A normal monsoon will, however, have a sobering effect on food prices. However, infrastructure spending has languished in the first year of UPA. New additions to rail and road infrastructure have slowed down. Financial deregulation has also moved at a slow pace, many important financial bills are pending before the parliament. Implementation of GST has been postponed to 2011.

But the biggest failure of the govt. has been on the political front. The govt. has not been able to combat the unreasonable demands of its crucial allies like Trinamool and DMK. It has taken some symbolic decisions like Telengana statehood, Women's quota but subsequently has transferred them to cold storage. These controversial issues are ticking time bombs for the stability of the Govt. Another major threat to the economy is the spread of the naxalite movement. The govt. has failed to form a consensus on this important issue. The inability of the govt. to hold prices of essential commodities is also a big negative of UPA II's first year report card. this is leading to a discontent amongst the masses and could be a setback for the stability of the govt.

The markets currently are in the grip of a negative sentiment. The sentiment is likely to improve in the last quarter of the year, provided monsoon is normal and prices come under control. It might coincide with some stability in the Euro zone. Equity markets will continue to languish for a couple of months, before resuming their upward journey. The out performance of India vis-a-vis the developed world will ensure that the markets prepare themselves for a decent up move in the last quarter of the year. Investors with a long term perspective are advised to accumulate stocks of Infrastructure, finance, pharma, healthcare and retail sectors on declines.

Different Strokes: Cricket and Equity Investing

Cricket is a passion in India and cricketers (other than film stars) of course are the demi gods. For those who play the stock market game it is no less than a passion. It would be interesting to find similarities between the two passions. Just like the followers of cricket, who think they could have done a better job than the selectors, most stock market participants also feel that no one can beat them in the world of investments. So there is no dearth of advice to Dhoni and his men on how to play cricket, as well as free advice on which are the best stocks where you can make quick money.

There are three versions of international cricket: test cricket (longer version), one-day cricket and the T-20 (instant cricket). Stock market investing also has 3 versions: Long term investment, medium term investment (from settlement to settlement), and the day trading, corresponding to the three versions of cricket. Because of the excitement it generates, the shorter version is the most popular both in cricket as well as stock markets. Shorter version of cricket generates the best TRPs for sports channels and the shorter version of markets (day trading) generates the maximum revenues for the business channels. Most of the advice given by business channels is for day traders, and long term investors need not give too much importance to that. But for real lovers of cricket, test cricket still remains the ultimate benchmark, where real merits of the players are tested. Similarly for long term investors, the real worth of a company/stock is discovered only in the long run.

Analytical skills play an important role in playing both the games. In cricket, the winning captain analysis the pitch report, the strengths of his team and the weakness of the opposition. In stock market, the investor analysis the global situation which is akin to studying the pitch report. Strength of your own team would mean analysing the strength of your economy/ company. The opposition here would mean other players in the markets, just like the bulls analyse the moves of the bears and vice-versa. Like a bad and bouncy pitch can undermine the performance of an excellent batsman, similarly an excellent stock can also decline if the global cues are negative. The stock market pitch report studies the global economic data. The Greek sovereign crisis is a case in point, which has led to a severe decline in our markets in the recent past. A test player really knows how to handle the situation if the pitch is bad. He would play defensive strokes initially and show his hitting capability when the pitch eases later in the day. Similarly, a long term investor is expected to be patient if the going is not good, if he wants to make money in the long run.

Winning a cricket game starts with selection of the best team, with a right combination of batsmen, bowlers and fielders. In stock market investing creation of the right portfolio is as much important for wealth creation. Each stock has to be picked on its merits after careful analysis. A cricketing pitch with an uneven bounce is akin to a volatile market. The volatility of the markets can be measured in terms of the volatility index (VIX), it is better to refrain from fresh investment when the VIX is high. Incidentally, the Nifty VIX has recently crossed the level of 30% after trading in the 15-25% band for quite some time. This indicates uncertainty in the markets ahead. A consistent player in cricket will always have a higher average, as compared to the one day miracles. Same is true for evergreen growth stocks versus the one day performers also known as momentum stocks. Long term investors should always focus on the former.

A cricket captain has to take a minimum level of risk to win the game. He must know when to become defensive and when to play his strokes. Too much defensive approach can also be bad for the team. Similarly, a stock market investor should know when to make a fresh investment and when to take his profits. The sweet timing of the stroke ensures that the ball will reach the boundary (destined goal). Early loss of a couple of wickets need not deter a good captain to take some bold steps to win the game. Similarly, in the markets if you have lost some money in the past should not deter you from entering the market again, but after learning from the past mistakes. Short term trading or excessive speculation is akin to lofting a good length ball, where the chances of losing your wicket (your money) are fairly high. Remember, 'a game cannot be won without playing, and wealth cannot be created without investing'. So take the plunge provided you have the appetite to take risk, there is a lot of money to be made on the stock market.

Equity Investing: Beware of irrational exuberance!

The economic growth momentum in India is fairly robust, and India continues to be an attractive investment destination for FIIs in the long run. But the negative sentiment from the Euro zone is weighing heavily on our markets, from a short to medium term perspective. The intermediate trend of our equity markets has turned negative and hence investors are advised to tread with caution. It is human psychology that we do not react to early warning signals, but wait for the time when we are forced to accept the reality. It happened when the 'Sub prime' crisis unfolded in the year 2007, and it is happening again with respect to the Greek sovereign crises.Ultimately, the markets will have to accept the reality, and adjust according to the impact of the crisis. I have a feeling that slowly the feeling of desperation is gripping the equity markets. In any case, the markets have discounted most of the positive news, however, a major downfall has been avoided due to the existence of excess liquidity in the markets.

Equity markets ride on the risk appetite of the global investors. The risk appetite takes a beating with negatives emerging on the economic scenario. The situation in Euro zone has reached alarming proportions, and the contagion affect will see the 'Greek crisis' extending to other Euro zone countries. Euro zone also continues to face the wrath of nature with volcanic ash clouds continuing to pose a threat to the Airline and Tourism industry. The current downturn in the equity markets should be viewed in the above context. Whenever their is a news of bailout packages, the markets tend to rise rapidly. This can only be treated as 'irrational exuberance', and investors should not get carried away by the bounces. Volatility in the equity markets is on a rise, and is likely to rise further. Major sectoral indices like Oil & Gas, Metals, Banks have turned negative. The markets are not expecting any immediate drivers for revival.

I continue to maintain that investment in Indian equity markets is the best bet for 'wealth creation' over a period of next 3-5 years. But investment needs to me made in a staggered manner. It may not be a bad idea to start an SIP (systematic investment plan) at this juncture. For those investors who would like to invest in direct equity can also use the SIP method to buy their favourite stocks. If you want to buy 100 shares of a company, buy it in four lots of 25 shares each, which will reduce your average cost if the market moves down. The markets are likely to remain in a corrective mode for at least the next 2-3 months. The trigger for revival of the Indian equity markets will only come with the advent of a normal monsoon and easing of inflationary pressure. The impact of the Euro zone crises will be marginal in the long run, as Indian economy is largely driven by domestic demand and has little dependence on the Euro zone. For the present it is most likely that our equity markets are heading for at least a 10% correction from the current levels.

Equity is the best bet for long term

Given the current scenario, investment in Indian equities is the best option for wealth creation for the next 5 years at least. The reasons to justify this argument are many;

• The resilience of Indian economy, in the aftermath of the global meltdown, has been proven beyond doubt. India has been one of the few global economies that have bounced back to the normal growth trajectory, whereas most advanced economies are still struggling to cope with the after effects of the crises.
• The Indian growth story is based on a strong domestic demand. Financial savings have been growing steadily in India and are poised to reach 16% of the GDP in the next 5-7 years. India which has a young population is likely to add over 100 million people to the working age category in the next 5 years, giving a further boost to the consumption lead boom.
• The FII inflows into Indian equity market have turned positive, and are likely to remain healthy over the next couple of years. Most developed economies are pursuing low interest rate and expansionary monetary policy, which will ensure ample liquidity in the system. The funds will continue to flow into Indian equity markets to take advantage of the high growth prospects of Indian companies.
• The infrastructure development theme will play out in India during the next 5 years. Heavy investments will continue to pour into roads, ports, airports, power, transport system as well as health and education sectors, as there is enormous growth opportunity in these sectors. The unique ID project will give a big impetus to IT spending in the country.

The moot question is whether this is the right time to invest in equity markets. Based on fundamentals our equity markets at the current juncture are in the region of 'fairly valued to slightly overvalued territory' trading at around 16-17 times forward earnings. On technical charts the markets have created a new range of 4800-5400 on the Nifty. Any dip from the current levels will be an excellent opportunity to invest for the long term. Although it is extremely difficult to predict the rise and fall of the markets, a 10% correction from the current levels will be a good time to accumulate your favourite stocks. Fortunately, the markets have started their downward correction, and are likely to move towards the lower end of the technical range suggested above. this level would take the markets into an attractive valuation zone (at 14-15 times forward PE) once again. Long term investors can loosen their purse strings at levels around 4800-4900 on Nifty, and if the correction extends beyond these levels it will be an added bonus. Wishing you happy investing times!

Emerging Debt Crisis: Who pays the price for 'Fiscal Profligacy'!

The International Monetary Fund (IMF) has issued a stern warning in the midst of a better than expected economic recovery: "The global economy is recovering from recession more quickly than expected but rescue efforts have worsened public finances, and if not reined in, will lead to a debt explosion." It has pegged global economic growth for this year at 4.2%, led by emerging economies like China and India. China is expected to grow at 10%, closely followed by India. IMF has indicated that the heavily indebted European countries should weaken their currencies to boost exports, and at the same time surplus countries like China should let their currencies to strengthen to boost domestic demand. However, this spells doom for the Indian exporters who are struggling to adjust against the rising Rupee. Surprisingly, the equity markets across the globe have so far ignored the writing on the wall. Perhaps 'liquidity overhang' has a major role to play in the current uptrend.

The economies in the Euro zone will have to start the process of fiscal consolidation soon as the debt to GDP ratio in many of these countries is close to the Word War II highs. Reducing debt to pre-crisis levels would require many painful steps including tax increases and cutbacks on core government programs like social security. The tax payers will have to share the brunt of the fiscal profligacy of their respective governments, who have doled out largess's to save many disgraced financial institutions from bankruptcy. In the midst of all the mayhem, investors from the Euro zone would continue to pump money into the emerging markets. By and large this augers well for the stock markets in India. But the markets have, at the moment, discounted all the good news, and there is no fresh trigger for the next up move. The markets are likely to take a breather, before embarking on a fresh onslaught towards attaining new highs in the next 18-24 months. Some of the negative factors which the Indian markets would find it hard to ignore are:

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  Rapidly rising inflation: Watch word would be the progress of monsoon rains in the sub-continent, a good monsoon would help reduce the pressure on food prices. A bad monsoon, on the other hand, may lead to rising interest rates, putting pressure on the bottomlines of companies.
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  Internal security situation: There are serious threats to India's security from across the border as well as from the naxalite insurgency within. The political will of the Govt. would play a positive role in averting any major disaster.
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  Unearthing of the Financial crises: The world for the time being seems to have tide over the Dubai and the Greek financial crises, but many such crises are yet to be unearthed. Any major debt crises has the potential to throw the world markets into a tail spin.
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  Any Political upheavels in India: The union Govt. has initiated certain measures in the past which may have serious political repercussions e.g the 'Women's Quota bill', 'Creation of new states' and other such controvertial issues which can stall the process of governance.

The world economy is passing through a very critcal phase, and any delay in curbing fiscal profligacy could be detrimental for the long term health of the Global economic stability.

Simple 'Mantras' for Wealth Creation

Wealth creation is a very simple exercise in reality, but many people have a tendency to make it look complicated. And this complication is created by those who want to create wealth at the cost of others. This includes a host of advisors and product pushers who complicate the matters without focussing on the crux of wealth creation, that is matching resources with the underlying needs. The problem with most advisors is that they take a very 'myopic' or 'short term' view of the client's situation, without taking into account the importance of fostering long term relationships. The gullible client falls into the trap laid by the maze of information floating around in the media in the shape of short cut schemes of becoming rich overnight. But, fortunately, there are no short cuts to 'Wealth creation'. One has to practice the simple mantras to accumulate wealth steadily over a period of time. Here are five time tested mantras of wealth creation:

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  Goals need to be defined: We all have certain dreams, these dreams are the starting point for determining our life's goals. But these goals must be defined properly and nurtured towards their fulfilment. Each goal must be reasonably linked to the resources available presently as also the resources that can be raised in the future.
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  Earnings need to be saved: Indians take pride in being called a 'nation of savers'. Our net savings ratio as a percentage of GDP has consistently been over 35%. Savings is a good habit which if learnt in the childhood lasts a lifetime. We must inculcate the importance of saving to the younger generation. Regular savings provide the cushion to tide over emergency situations in life like illness, accident etc.
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  Savings need to be invested: Earnings saved is only 25% of the job done. Unless saving is invested profitably, wealth creation remains a distant dream. Many of us have never thought of savings beyond the bank deposits or guaranteed return government schemes. But, little to our knowledge, most of us are destroying wealth by putting our entire life long earnings into these schemes, as most of the appreciation in their value is eaten up by inflation. We must diversify our investments to gain in the long run. Investment in riskier assets like equity is not a bad idea, provided we understand its worth.
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  Expenses need to be budgeted: With the advent of development in the Indian economy, our expenses are multiplying fast. Many earstwhile luxeries like mobile phone and laptop have become necessities in modern life. But one must control the temptation to acquire a product unless it is matched to your need. We need to budget our expenses: a classification into essential and non-essential expenditure will help us tide over this dilemma. Most non essential expenditure needs to be foregone or at least postponed.
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  Debts need to be limited: Easy availabilty of credit often lures people to go in for non essential puchases, thus imparing their capacity to repay the debts taken. Debts must be properly analysed, otherwise we would lead ourselves into a 'debt trap', which can ultimately lead to a 'death trap'. The recent global meltdown, that ocurred in 2008-09, is a grim reminder of the reckless recourse to debt without having proper earnings/ resources to match it.

To practice these five wealth creation mantras, we need to have a better understanding of the financial world, either independently or with the help of a trusted advisor. 'Financial Wellness' is definitely a step towards attaining 'Physical Wellness'.

Emerging Markets set to outperform Eurozone

Stock markets in India have ended FY 2009-10 on a buoyant note, and most investors have made decent money during the past one year. Infact a majority of the global markets have been on a sustained uptrend since the beginning of the year, backed by excess liquidity on the back of massive stimulus packages doled out by Central banks. What lies in store for the world markets in the next year?

There are signs of inflation crossing the safe limit stipulated by the RBI, and accordingly the Central bank has started the fiscal tightening process by raising the Repo rates. Experts feel that more tightening measures are in store in the first quarter of the next fiscal, as inflation is likely to increase till the end of June on a low base effect and supply-demand mismatch for agricultural commodities.The equity markets look fairly priced based on the fundamentals, but India and other emerging markets are likely to outperform the markets in US and the Eurozone.

The GDP growth in US and the Eurozone, on the back of stimulus packages, can at best be maintained for 2 quarters, and the second half of 2010 will see growth in these economies slip by 100-150 basis points, once the demand created by the stimulus packages runs its course. There is more trouble feared in the Eurozone on account of huge deficits in many countries, Greece seems to be only the tip of the iceberg. Japanese economy continues to falter as the Yen strengthens. The 2nd half of the year would be critical for the countries in the Eurozone and Euro as a common currency. India will continue to be a favoured destination, against the weakness in the Eurozone. But the jitters of the negative developments will be felt in our markets too. And any political instability could add fuel to fire.

In such a situation investors are advised to adopt a wait and watch strategy. Although equity investment remains the best bet in India, intermittent corrections should be made use of to enter the markets at lower levels. Currently our equity markets seem overheated, although they may attain new two year highs in the near future. Buying for long term can be considered when panic sets in due to any of the factors mentioned above coming into play. Overall, Indian economy is likely to outperform developed world economies in the next 2-3 years.

Unique ID Project: India on the threshold of another IT revolution

Unique Identification Authority of India (UIDAI), established in February 2009 promises to become the harbinger of another IT revolution in India. The authority, headed by Nandan Nilekani, aims to provide a unique number to all Indian nationals based on a biometric database. The major advantages of the UID numbers will be:

• Promoting 'Financial inclusion' through smooth distribution of subsidies and grants under the poverty alieviation programmes such as NREGA
• Conducting free and fair elections, sans rigging
• Controlling illegal immigration into India
• Combatting  terrorist activities on our soil.

The estimated cost of providing a unique identity to Indian citizens is expected to cost US $ 6 billion (Rs.30,000 crores). The first phase of its implementation is likely to create business opportunities worth over Rs.6,500 crores. The finance minister has provided Rs.1,900 crores for this prestigious project in budget 2010-11. Top IT vendors including Infosys, TCS, Wipro, IBM, Accenture, Mastek, Mindtree, Siemens, Mahindra Satyam and Logica have been initially shortlisted for the UID project. This will be followed by technical evaluation of these vendors. 'Ernst & Young' has been appointed as consultant to the project. The project will be a major milestone for India's Rs.66,000 crore domestic IT market.

The gigantic proportion of IT spending envisaged through the project will give a major boost to the revenues of Indian IT industry. The learning generated through the implementation of the project will help these companies to tap the market for such project around the globe. Evaluation of this project and the vendors associated with its implementation, augers very well for the bottomline of these companies. Investors are advised to have a decent exposure to the domestic IT sector to reap the benefits of the second IT revolution in the world, this time led from the front by India.

Eqiuty Markets give a thumbs up to budget 2010-11

Of the past 19 budgets presented in India, bears were leading the bulls by a whisker 10-9 (i.e, the equity markets had fallen 10 out of 19 times immediately after the budget was presented). However, the response of the market to Pranab Mukherjee’s Budget 2010-11 has helped bulls draw level. Both Sensex and the Nifty made handsome gains immediately after presentation of the budget. The gains have continued to grow during the two weeks post budget presentation. The consistent run up since the budget, has some investors worried. How long can this bull run last?

Although, the long term trend for our equity markets is definitely up, because of the spectacular turn-around in the fortunes of the Indian economy after a brief slowdown. If the recent economic data is an indication, the economy is firing on all cylinders, and might surprise us with a GDP growth of well over 7% in 2009-10. The budget has given a booster dose to the India growth story with consumption oriented incentives. In the short run, some of the budgetary measures may seem to be inflationary, but removal of supply side bottlenecks will ensure easing of the inflationary pressures from the 2nd quarter of fiscal 2010-11.

The post budget bull run is driven by FII investments, FII's have pumped in over Rs.10,000 crores in the equity markets since presentation of the budget. But domestic institutions and retail investors have been booking profits in this bull run. Two major factors that need to be watched by investors for sustainance of the current bull run are:

• Strengthening Rupee: The rupee which was trading around 46.50 to a dollar before budget closed at 45.45 on Friday 12th March. Analysts expect the rupee to remain firm during the current month. January industrial growth at 16.7%, and the marked improvement in exports augers well for the stregthening rupee.
• Falling VIX: The Nifty VIX, which measures the immediate expected volatility of Nifty, closed at 19.73 on friday 12th March, its lowest closing since its launch on November 1, 2007. The VIX breaking down below 20 is likely to trigger a further upside in the NIfty.

Investors are cautioned to watch these two key indicators closely, and any reversal in any or both should be taken as a cue to trim your positions in the equity markets. After all, it is not a bad idea to take some profits home as the old proverb says 'Make hay while the sun is shining'.

Budget 2010-11: Cheers for the Tax payer

According to Pranab Mukherjee, Minister of Finance "The union budget cannot be a mere statement of government accounts. It has to reflect the government's vision and signal the policies to come in future." Viewed in the context of this statement, the Union budget presented by the FM on 26th February 2010, is a precurser of the changes envisaged during the remaining tenure of UPA II government.

FM has enumerated the undernoted challenges before the government:

• Quickly revert to the high GDP growth path of 9%, and then find the means to cross the 'double digit growth barrier'.
• Harness economic growth to consolidate the recent gains in making development more inclusive within a fixed time frame.
• Remove weaknesses in the government systems, structures and institutions at different levels of governance.

The message of the FM is pretty loud and clear: Growth cannot be sacrificed at any cost. Some economists may term the budget as inflationary, but the govt. is confident that the growth in demand complimented by augumenting the supply side mechanism can stiill avoid an inflationary bias, while steering the economy on the growth trajectory. Budgetary allocation fo infrastructure development has been raised to Rs.1,73,552 crores (46% of total plan outlay), and spending on social sector has gone up to Rs.1,37,674 crores (37% of total plan outlay). Augumenting fresh resources to the tune of Rs.75,000 crores through disinvestment of PSU stock and 3-G spectrum sale will enable the FM to reign in the fiscal deficit to 5.5% in 2010-11, as against 6.9% envisaged in the revised estimates for the year 2009-10.

In his endeavour to deliver inclusive growth, FM has made sure that while selective subsidies and cash subvevtion would continue to be made available to the weaker sections of the population, the burden of taxes shall be shared amongst a large cross section of the population rather than a handful of tax payers. The tax bonanza to IT payers is a step in this direction. The revision of tax slabs upwards will lead to a substantial cash in the hands of individual tax payers which will give the necessary boost to consumption and saving, and lead to the feel good factor amongst the honest tax payers of the economy. Whereas these measures would lead to a revenue loss to the govt. agg. Rs.26,000 crores on the direct tax front, shall be more than made up by the additional revenue of Rs.46,500 crores through indirect taxes including service tax. There has been an appreciable shift towats indirect taxes to ensure inclusive participation in taxation.

In meeting the third objective, FM has spelt out the following initiatives:

• Tax reforms: Roadmap for role out Goods and Services tax (GST), and the Direct Tax Code (DTC), wef 01.04.2011 has been laid. This will lead to uniformity and simplicity in the tax structure.
• Nutrient based fertiliser policy already notified shall be applicable from 01.04.2010. FM has spelt out that Kirit Parikh committee recommendations on deregulation of motor fuels shall be taken up by the cabinet soon.
• Companies bill 2009, will address issues related to 'Corporate governance'.
• National Clean Energy fund will encourage research in innovative projects and will ensure use of alternate energy resources like solar and wind energy.
• Unique Identification Authoriry of India (UIDAI) under the Charmanship of Nandan Nilekeni will be able to roll out the first set of UID numbers in the current year.

Individual Tax payers owe a special thanks to the FM for the special IT bonanza in this years budget.

Banks to move from BPLR to 'Base rate': Implications

The issue of Banks differentiating between old and new borrowers has come under the scanner of 'Competition commission'. Existing borrowers feel cheated when their bank offers a lower rate of interest to the new borrowers, while they are not allowed a reset for their existing outstanding loans. If they want to liquidate the loan and move to another lender, they are required to pay a hefty pre-payment penalty ranging anywhere between 1-3%. Banks have justified this juglery on the pretext that they need to protect their Net Interest margin (NIM), and the banks can offer loan reduction to existing borrowers only with a time lag, because they need to overcome the mismatch between their asset and liability buckets. Moreover, with more than 50% of the loans sanctioned at sub-BPLR rates the concept of the BPLR has been rendered redundant.

To enable the banks to set their lending rates in a scientific and transparent manner, the Reserve Bank of India has proposed a system that will replace the existing system of benchmark prime lending rates (BPLR) with base rates. The formula for calculating the base rate will take into account the cost of deposits, cost of complying with CRR and SLR requirements, and the need to retain a profit margin. There will be a markup depending on the cost of operation for a particular type of product and premiums for credit risk and tenor of loans. The existing BPLR system does not quickly or adequately respond to changes in policy rates, thus reducing the effectiveness of monetary policy. Transparency will be enhanced under the new syatem. The priority sector lending at sub-BPLR rates will be unaffected as the base rates will be set much lower than the existing BPLR of the banks.

Based on the 2008-09 numbers, the base rate varies from 5.22% for Citi to 8.91% for OBC. Broadly speaking, foreign banks have the lowest rate followed by public sector banks and then private banks. Currently, the PLR of most banks are more or less the same. It would be interesting to find out  that once the base rate scale is known to all potential borrowers and varies according to a uniform predetermined formula, potential customers would have a choice provided the banks have the willingness. With savings bank deposit rates set to be calculated on daily balances from 1.4.2010, banks profitability will be under some more pressure. Most Banks have sought period till the end of June 2010 for implementation of the new lending regime.

Speculation: A blessing in disguise!

We take many decisions in our day to day life, without really knowing the outcome of those decisions. There is always a probability of success or failure of that decision. For example, during the rainy season, we have to take a decision whether to wear a raincoat or not, based on our expectation whether or not it will rain during the day.What exactly is speculation? Speculation in respect of the financial world includes the buying, holding, selling, and short-selling of stocks, bonds, commodities, currencies, collectibles, real estate, derivatives or any valuable financial instrument. It is different from buying because a speculator does not buy goods to own them, but to sell them later. The reason is that he wants to profit from the changes in market prices. Speculation is one of the market roles in  financial markets. The others are hedging, long term investing and arbitrage. Speculators do not plan to keep an asset for a long time.

Common features of non speculative markets are:

• Almost total absence of leverage, and has limited depth
• Shares, bonds and other assets are bought primarily for cash and not on credit
• The expectations of capital gains are low
• Trading volumes are low, and trading is dominated by a small group of people.
• The markets are traditionally undervalued markets

A majority of the Asian markets, including India were non-speculative markets till the 80's. In India, in the 70's and 80's people bought homes only to live in them. Gold & silver held by the families were non-speculative in nature. With the globalisation of asian economies an element of speculative interest has been built in these markets. There has been a lot of interest in these markets from the foreign investors largely because of the huge growth potential, as most of these markets had been depressed for long, because of the lack of speculation. The Asian markets led by China and India are currently going through a long term "bull phase", which is marked by higher speculation.

According to John Templeton "Bull markets are born on pessimism, grow on scepticism, mature on optimism, and die on euphoria.” An investor should not be unduly worried about the higher volatility in our markets, because just like small cap growth stocks tend to be more volatile than established blue chips, emerging markets tend to be more volatile than matured western markets. But then they also have the potential to deliver higher returns.

However, investors must be aware of the speculative excesses, which often cause the end of bull markets. Here are some of the symptoms of speculative excesses:

• The long the uptrend in the market, the higher is the likelihood of creation of a mania or 'herd instinct'. Long term bull markets survive only if there are intermittent corrections within the bull run
• In the maniac phase of the bull market the mood is euphoric, and even dud stocks rise appreciably
• The number of new issues is very high
• The mania is whipped by the media, because their business survives on creating the hysteria.
• Towards the end of the maniac phase, insiders resort to double standards - painting a rosy picture about their businesses in public but paring their holdings in the company
• Sometimes it results in surfacing of 'Ponzi schemes' and 'Swindlers'. The likes of Harshad Mehta and Ketan Parikh are the creations of the excessive speculation phase.

Sir Isaac Newton amply sums up this frenzy when he says: “I can calculate the motions of heavenly bodies, but not the madness of people”. Speculation is good for the markets, untill the above symptoms appear. Investors can safely ride the current long term bull market in India, but must guard against the above factors to protect their interests.

Vision 2020: Where to Invest?

Indians have traditionally been one of the highest savers in the world, but they have rarely looked beyond the traditional asset classes. The coming decade promises to offer a lot of opportunities for investment. At the outset we must understand the difference between 'Saving' and 'Investment'. Typically, savings instruments take care of our liquidity needs, and they are hardly able to beat the inflation. The better part of our surplus money, therefore, needs to be directed towards investment, to enable us to acheive our cherished goals. The ideal way to plan for the future is to seggregate one's portfolio into: Core portfolio also known as strategic investment, and the other part could be the sattelite portfollio also called tactical investment. About 60-70% of the corpus needs to be allotted towards the core portfolio.

The Core portfolio should be made up of the following asset classes:

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  Cash/ Cash like instruments: These instruments offer the highest safety and liquidity, and help us to create a contingency fund to overcome unforeseen circumstances. Bank deposit form a large chunk of this asset class. As bank deposits typically follow the interest rate cycle, they tend to rise when inflation is high. It is advisable to get into long term bank fixed deposits when the interest rate cycle is at its peak.
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  Bonds/ Other fixed income instruments: These instruments are typically used for parking your surplus cash, when the outlook for equity and other risky asset classes turns negative. Rather than putting money directly into Govt./ corporate bonds one must invest through debt market schemes of mutual funds to take care of liquidity and diversification issues. These investments would give a slightly better return as compared to bank deposits.
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  Eqiuty: Also known as risk capital, equity markets are prone to more risk and volatility as compared to fixed income instrumrnts. But history tells us that in india equity markets have given far superior returns over longer investment durations. The core portfolio should include a decent amount of equity for all types of investors. Care should be taken to invest in divetrsified equity funds that invest in large cap stocks, which are less prone to volatility. Typically, the investemnt horizon for equity investemnt should be more than 3-5 years.
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  Bullion: Indians have been investing in bullion since time immemorial. Gold has been traditionally treated as a hedge against inflation. But strictly speaking gold has not lived upto this expectation in the long run. Gold is a typical asset class, whose price is determined more by speculation rather than the intrinsic worth. We generally buy stocks of companies based on their past perforamnce, but gold investment does not follow any such yardstick. However, gold must form atleast 10% of the core portfolio simply as a tool for diversification. The best way to invest in gold is through Gold ETF's.
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  Real Estate: Real estate also must form a reasonable part of the core portfolio. But we must keep in mind that this is one of the most illiquid asset class. While going for a second house/ real estate investment, one must identify a reasonable price for it - a common yardstick should be a rental of 4-5% of the purchase price plus the chances of a capital appreciation in excess of 5% per annum. While going for a residential property it must be noted that plots offer better rate of appreciation as compared to built up flats, become it is the price of land that appreciates, the price of construction does not appreciate.

Other asset classes or investment avenues should form a part of the non-core portfolio. Here active churning is required to take advantage of the dynamic pricing environment. The non core portfoilio can include investment in high beta mid-cap stocks, investemnt in commodities other than gold, and currency/ future and option trading. One must indulge in building this portfolio only if you understand their characteristics and market behavour. The next decade will also provide Indian investors an opportunity to invest in cross currencies and other physical foreign assets.

Vision 2020: 'Decade of the Discerning Investor'

The Indian investor never had such a wide choice of investment avenues as he now has. On the one hand this has created an enormous opportunity for 'wealth creation', but at the same time it has imposed a lot of responsibilty on the investor to take prudent measures to avoid 'wealth destruction'.

The generation of 50's and 60's was essentially a generation of savers, there were very few investment products available to them for investing. But, in their hindsight, they were prudent enough to invest a decent part of their savings into gold and real estate. Entrepreneurial spirit picked up in our country in the 70's and 80's, but the predominance of higher income tax rates ensured that investors did not look at alternate investments beyond those that offered tax benefits. The first mass equity related product US 64, popularly known as units, became popular during this period. However, the equity cult was ushered in India by Dhirubhai Ambani in the 80's. But assured return products like Public Provident Fund and Govt. Bonds like NSC, KVC which offered risk free/tax free return of upto 12% never allowed riskier assets to be a part of the Indian investor's portfolio.

The decade of 90's came as a major game changer when Indian economy embraced globalisation, though reluctently in the initial period. The economic stability and the higher growth of the economy led to advent of the bold new Indian investor who was no longer afraid to take risk. A slew of new products like GDR/ ADR/ Variety of Bonds were introduced during this decade. This process continued through the next decade. To guide the investor in choosing the best among the new products a breed of financial advisors including stock brokers, mutual fund advisors, real estate advisors, tax advisors established themselves during the decade gone by. But, unfortunately, in their quest to make more money at the cost of the investor, most of them merely did the job of 'product pushers'. The system of embedded commissions ensured that the so called advisor could give advise even without having a proper understanding of the markets and still could make a lot of money at the cost of the investor.

Towards the end of the last decade, several positive steps have been taken by the regulators to send the message across that it is the end of the road for the 'commissions regime', the advisor would have to earn his fees from the client in lieu of the advice given. The online trading platform has ensured drastic reduction in brokerage. Similarly front loaded commissions on Mutual Funds have been stopped, and a move is on to reign in the insurance commissions. The new direct tax law aims to make the taxation system a simplified affair with a large number of deductions withdrawn, but with more than commensurate reduction in tax rates/ tax slabs.

The new decade promises to be the decade of the 'Discerning investor'. A variety of new products are in the offing: REITS (real estate investment trusts), extension of currency & commodity derivatives, a slew of international investment products. The regulators are bound to create an environment where the investor will be free to take an informed decision based on genuine information. To help the investors take informed decisions, a new breed of qualified advisors will take over from the product pushers, who will guide the investors through the maze of investment opportunities. The investors will not be averse to a fee based system to remunerate the advisors for the services rendered.

There will be lot of opportunities for 'Wealth creation', provided an investor takes decisions based on his risk profile and life goals. The investor will have to balance his Risk-reward matrix to meet his financial requirements. The next decade will open a window to several new opportunities for Indians to invest, we must seize the initiative and invest wisely, because sky is the limit for creating wealth in the coming decade. I propose to highlight the various asset classes for the new decade in my next post.

Vision 2020: 'India's Decade of Glory'

While the decade gone by transformed India from a sleeping economy to a vibrant economy, the world has taken note of, the decade just started is destined to be 'India's decade of glory', that promises to fulfil the 'Vision 2020'. There are some very strong indicators that are pointing towards India's march towards becoming the fastest growing economy that will dominate the world by 2020:

• With a younger work force, that is technically more qualified, India has the potential of supporting a sustainable GDP growth of around 10%, India can overtake China as the fastest growing economy during the current decade, as China is likely to be faced with an aeging work force and the spectre of being faced with the compulsion of letting its currency appreciate steadily against the dollar, that will lead to a slowdown in its GDP growth rate over the decade.

• The political clout of India is going to increase in the world, as its economic prowess spreads. India is most likely to join the elite club of permanent members of the UN Security Council. Its quest for altrnative sources of enegy is likely to make India more or less self sufficient in meeting the growing energy demand during the current decade. The astronomical rise in price of crude oil will make it compulsory for nations to search for alternate energy resources, and India is poised to lead this revolution by promoting the use of Solar, Wind, Hydel and Nuclear energy.

• The democratic institutions in the world's largest democracy will flourish in the new decade. There may be initial hiccups in the domestic political landscape as the demand for smaller states gathers momentum, but the smaller states may be administratively easier to control in the long run. By 2020 India may adopt the US kind of federal set up with over 40 states. The technological advancement in administrative set-up in the aftermath of the implementation of the unique citizen ID project will aid in smooth administation of the country. The 2- party system at the centre of the federal structure is likely to provide a stable political environment in the country by 2020.

• India has the potential to become the most sought after Business as well as Tourist destination in the sub-continent, overtaking the likes of Singapore, Malaysia by 2020. Themes like Eco tourism, Education tourism, Health and Medical tourism will lay the foundation of India becoming a major tourist hub by 2020. Infrastructure development supported by a highly sophisticated and efficient transportation system will help India achieve this status.

However, India needs to guard against terrorist attacks from across the border, and the insurgency from within. Our foreign policy needs to be revamped to give an impression to the world that we are not a soft state. Similarly our security forces will have to be equipped with modern gadgets to thwart any attempt to disturb the peace of our country.

Our markets will also reflect the mood of a resurgent economy, but there will be some sectors and some asset classes which are likely to outperform the broader markets. I propose to cover the market scenario for the coming decade, in my next post. Wishing all of you 'Happy Investing' in the new decade.