200th Post: The story of Gloom, Boom & Doom

It has been four years since December 2007, when I started writing my blog. Today I complete 200 posts, this one has to be very special for my readers. It has been a roller coaster ride for the equity markets over the 4 year period since December 2007. The markets created history by scaling 21,000 levels on the Sensex on 11th January 2008, only to fallback  to 8,160 levels on 9th March 2009, and again rising to 21,000 level on 5th November 2010 (Diwali day). Since then our markets have slipped into a bear phase which is now getting closer to its nadir.

Some of my readers/ critics have accused me of being too negative on the markets in the recent past. I know most of us who invest in equity markets are bulls at heart and would like the markets to move in one direction only. But, we must appreciate the theory of business cycles that reflects in the Gloom, Boom & Doom in the markets. The current phase of gloom has been reflected in my analysis of the markets in the recent past. The reasons for my negative view have been based on the under noted factors:

• Political factors: The non-governance under UPA II has led to a policy paralysis and the opposition is least interested in letting the Govt. function. The results are for all of us to see, the investment cycle has turned negative with the economy recording negative IIP numbers for October 2011. There seems to be no end to the impasse.
• Economic factors: Inflation has continued to be stubborn, leading to a record 13 rate hikes affected by RBI till November 2011,which has virtually broken the back of India Inc. The result of high interest rates is being reflected in the profitability of companies leading to successive downgrades in Sensex projections.
• External factors: The Euro zone crises has moved from bad to worse creating ripples across the equity markets world over. Money is moving out of risk assets. Depreciation of the Rupee is also causing a lot of hardship in terms of higher cost of imports, leading to widening of the already high fiscal deficit.

So much for the bad news, now for the good news. Let us indulge in 'Crystal gazing' for the year 2012. Our equity markets are ripe for a sharp correction soon, and thereafter will see a strong recovery. I shall not be surprised if the markets not only regain the lost ground but will most likely make new highs (surpassing 21,000 on sensex and 6,300 on Nifty) by December 2012. The markets are likely to make a panic bottom in the period from December 2011- January 2012. This analysis is based on the past trends. According to Fibonacci analysis a bear phase in Indian markets lasts between 13-15 months, and the bear phase is on since November 5, 2010. The markets are likely to make a panic bottom around 14300 on the Sensex (4300 on the Nifty).The worst case scenario could take the indices towards 13,000 and 3,900 respectively. Thereafter, we may witness a strong revival.

The reasons of the equity market revival in 2012 are analysed below:

• A Doom and gloom situation is followed by a Boom phase, as per the theory of business cycles.
• The Boom phase is preceded by low inflation and falling interest rate cycle. In all probability inflation will fall sharply due to high base effect and RBI will have no option but to reduce REPO rate on 24th January 2012. This will revive the investment cycle.
• FII's will return to the Indian markets as Indian Rupee starts strengthening from January 2012, it may move up to the levels of 47-48/ $ by March 2012.
• The political circus would play out in December 2011- January 2012, and the Govt. will return to business thereafter.
• At some point in time Euro Zone crises will prove to be a boon for emerging markets, money will flow into Indian equity markets also.

Dear investors, get ready for the Boom phase in Indian equity markets in the 2nd half of 2012. Start investing now as panic sets in the markets. And do send in your opinion/ comments.

'Murky Politics': Could burn a deeper hole in your pocket

The political scene in India is becoming murkier day by day. There is total anarchy in the functioning of our parliamentary democracy. In such a situation investors are advised to stay away from the equity market, and wait for the dust to settle. As things stand today, there is a total failure of governance and the blame has to be equally shared between the ruling party and the principal opposition party. The govt. of the day is in the saddle not because of its achievements but because of the 'TINA' factor. And the main opposition party is so bankrupt of ideas that it cannot think of coming back to power on its own strength, therefore, it is putting spanners in the functioning of the govt. The BJP's eternal 'PM in waiting' is making things worse for his party.

What could be the immediate fallout of this political logjam on the financial markets:

• Growth would suffer badly and the danger signals are fairly loud and clear. The GDP growth for Q2 has dipped to 6.9%, with core sector growth slowing to a meagre 0.1% and some sectors such as mining showing negative growth. The ongoing projects are already suffering due to lack of capital, while many sectors like power sector are facing an acute shortage of raw materials.
• The signals for the foreign investors are extremely negative, which is leading to a free fall in the value of the Rupee. Any further depreciation in the value of Rupee could lead to throwing the Govt's finances to the winds, the fiscal deficit coming under tremendous pressure. It is already threatening to destabilise several industries such as Aviation and Oil & gas.
• Imported inflation continues to haunt the policy makers. Higher inflation emanating from import of essential goods is not allowing the RBI to reduce rates despite being fully aware that the high interest rate regime is crippling growth.
• All the above economic factors would lead to a serious erosion in the earnings of our corporates, leading to downgrades across sectors. Ultimately the equity market will discount these earning downgrades and would punish the companies. Stock indices would follow siute with strong downward moves.

There is a very serious threat to a further erosion in the investors' wealth. The only way you can protect your wealth is to stay in cash, generate more cash by selling on every rise, and wait for a panic situation to emerge to deploy that cash. Many analysts are today talking of levels between 4100-4500 on the NIFTY to be achieved fairly soon. The temporary infusion of equity by central banks may push the Nifty towards 5000 levels in the very short term, which will present a golden opportunity to lighten your equity portfolio. And, god forbid, if the incumbent govt. were to fall, the chances of which are fairly high, the country may be pushed into a mid-term election.The equity market would seem like a 'bottomless pit' in such a situation, reminiscent of the 2008 doom. I sincerely hope this does not happen, but investors should be prepared for the worst case scenario and act accordingly.

Loosen your purse strings as panic sets in

A panic situation is building up in the markets, and this is the right time for long term investors to make a killing in equity markets. So far the markets have been falling in slow motion but the panic is about to set in. Far too many negative factors have emerged for the markets, but the silver lining on the horizon points to the fact that we are nearing the end of the gloomy scenario, after a knee jerk reaction on the downside. Long term investors need not panic at this juncture as this is an opportune time for long term wealth creation. Let us analyse the domestic and global factors that will soon signal the revival of risk appetite in the markets.

Domestic Factors:

• Rupee Depreciation: Indian Rupee has nosedived to 3 year lows against the dollar and other global currencies. It is likely that rupee will stabilise around Rs.51-52 to a dollar, and thereafter show some appreciation in January 2012. The stability of the Rupee will likely lend a helping hand for revival of equity markets.
• Inflation: The stubborn inflation that has been inviting a hawkish stance from RBI towards interest rate hikes is giving indications of a cool-off. Even if inflation growth remains at the current levels, a low base effect will ensure that the inflation figure will move towards the sub 8% levels by the end of January 2012. This will signal the end of a rising interest rate cycle, paving the way for growth in corporate earnings in last quarter of current fiscal.
• Political stability: A stormy winter session of parliament is likely to provide some hiccups to the markets, but stability is likely to be restored towards the end of the session. The govt. may revive the reforms agenda in the winter session, which is likely to be watched carefully by FII's. Financial reforms will pave the way for restoration of confidence in the Indian economy.
• Valuations: The valuations of Indian stock market at 4800 on Nifty have become attractive. The risk reward ratio is quite favourable at these levels, the downside risk being limited to a dip of another 5-6% only from these levels. The upside could be as high as 25-30% from these levels over the next one year as the market tries to rebound towards the earlier high of 6300 on Nifty by end of 2012. In the interim, the markets could dip to around 4500 levels on Nifty, which level could signal a strong rebound.

Global Factors:

• Euro zone crises:  The euro zone crises is likely to play out in another 2-3 months with more downgrades in the offing. The positive impact of the crises for Indian economy could be felt in the shape of falling commodity prices. Crude oil prices have started to cool off despite increased winter demand from US. Softening commodity prices will have a positive effect on the bottom line of Indian corporate sector.
• Revival of US economy: US economy has been showing signs of revival, which augers well for Asian economies. This will revive the investment cycle in Asian economies, and we could see a growth of FII flows into India. Risk capital is likely to resume its flight towards India as the investment cycle turns favourable. Strengthening of the rupee will help this cause.

Investors are advised to revive their risk appetite and start investing in equity markets for decent gains over the next few years.

All that glitters is 'Gold'

This age old adage seems apt if you consider the returns an investment in gold has delivered in the recent times. It is appropriate to review the 'Gold phenemenon' on the auspicious occasion of 'Dhanteras'. Dhanteras, also known as Dhantrayodashi, takes place two days before Diwali in honour of Dhanavantri, the physician of the gods and an incarnation of Vishnu. Dhanteras falls on the thirteenth day of the month of ashwin. The word "Dhan" means wealth. As such this day of the five-day diwali festival has a great importance for the rich mercantile community of north-western India. On this auspicious day women purchase some gold or silver or at least one or two new utensils.

Gold has been the best performing asset class during the past decade, delivering a return (CAGR) of 19% per annum during 2001-11. Analysts are advising investment in gold at declines as the major trend continues to be up. Gold is a unique asset class that delivers similar returns across the globe (the returns may vary according to the appreciation/ depreciation of currencies). Gold became a standard of monetary value as per the gold standard, where monetary authorities offered a guaranteed return in exchange for the paper currency. However, the gold standard was abandoned in 1970's leading to a free float in gold prices. Indians have been using gold as a store of value for over 5000 years, according to one estimate privately held gold with Indians is over 15000 tons. India currently accounts for over 38% of world gold demand.

The rise of gold prices is also linked to the 'fear index'. Most of the action in gold prices since 2002 has been attributed to the actions of the US FED. The weakness of US economy has lead to huge budget deficits which are financed through printing of dollars. The lack of suitable investment avenues has lead to the excess dollars fuelling commodity prices, including gold. The Eurozone crises has also increased the fear index helping investors to seek safe heavens such as gold. The preference of Indians towards gold is still strong, however, the mode of holding gold has undergone change in the past few years. more and more investors now prefer investment through paper gold as compared to physical gold. At the end of September 2011 the investment in Gold ETFs has gone up to Rs.8200 crores. The volumes at commodity excahanges have also gone up substantially in the recent past.

Financial planners also  recommend investors to hold 5-15% gold in their portfolio, as gold acts as a hedge against other asset classes. So go ahead, and make your portfolio glitter with gold this 'dhanteras'.

2nd Quarter earnings may show muted bottomlines

The earning season has started off with a bang but it may end with a whimper! Equity markets have cheered the better than expected results of Infosys and the in line results of RIL, but it may just be the tip of the iceberg. A detailed analysis of Infosys results throws up some interesting facts. A major portion of the incremental profits have been attributed to the depreciation of the rupee, a situation which may not last long. In case of RIL the GRMs are on a decline on QOQ basis and the company is sitting on a pile of cash which it is unable to deploy due to the economic slowdown. The result season as it unfolds will have more surprises on the downside rather than upside.

Rising interest rates are likely to give a severe hit to the bottom lines (Profits) of majority of the companies despite a steady growth in the top line (Sales). The analysts consensus estimate for Sensex EPS of 1250 at the start of the financial year has already been downgraded to 1175 after first quarter earnings. There is a possibility of a further downgrade of 4-5% in the ensuing quarters, as IIP numbers stumble and inflation continues to soar. The RBI continues to signal that it is not going to end the fiscal tightening till the inflation is on the boil, so markets are expecting another round of rate hike in the October policy review. This does not auger well for the bottom lines of the companies.

While the Sensex at 17000 and the Nifty at 5100 seem fully priced at the current levels (trading at around 15 times FY 11-12 earnings), certain pockets of the market are still at very high PE multiples and will need to correct substantially before the markets finally bottom out. Another pull back towards the major support of around 4700 on the Nifty is likely on the cards. That would perhaps be the right time to enter the markets with a medium to long term perspective.Investors may review their portfolios based on the quarterly results announced by the companies. It may be a good time to bet on the beaten down sectors like infrastructure (road construction, ports, logistics etc.) in the next bout of panic selling.

All is not well: Investors need to protect capital

The global news flow is pointing towards the fact that 'All is not well' for risk assets and equity markets. Despite Eurozone giving indications of stitching a package to bail out Greece and other countries, or ministers of Union Govt. in India calling for a temporary truce, the global markets are not yet out of the woods. We are inching closer towards a 2008 like situation, when all markets nosedived in tandem. The only exception till now has been the real estate market which is still holding fort despite heavy odds. Equity markets world over have shown strong bearish overtones. Last week, commodity markets, including gold and silver, have shown signs of capitulation. Real estate market is the last to show a decline, when liquidity is squeezed out. The announcement of a massive debt raising programme of over Rs.50000 crores by Govt. of India is likely to give a huge negative on the liquidity front. With RBI unrelenting on the hawkish stand on rate hikes the things do not seem rosy at all for the huge debt ridden real estate sector. It is only a matter of time when the downturn will gather momentum.

The high level of Nifty VIX (volatility index) is clearly indicating nervousness amongst market players. What should retail investor do at the current juncture? As indicators are pointing towards a 'lower top and lower bottom' formation in the Indian equity markets, investors are advised to book profits on every rise. Fresh investments should be put on hold till markets firmly make a bottom, anywhere in the range of 4500-4700 on the Nifty. That would be the time to make fresh purchases in equity markets. On the other hand, it is also not advisable to shift money to commodity markets, as global downturn is likely to take a heavy toll on the commodity prices. Precious metals like Gold, Silver, Palladium may show a temporary bounce due to the ensuing festive season, but they are ripe for a steep fall of 15-20% in the medium term.

The age old adage 'Cash is King' seems to be the best option at this juncture. Investors are advised to hold enough cash (and bank deposits) in their portfolio, and wait for better opportunities to emerge for investment in risk assets like equities and commodities. For India, things will start to improve in the next 3-4 months, once RBI signals an end to the high interest rate regime and commodities, including crude oil, slip to reasonable levels. The fortunes of Indian economy will hinge largely on the developments on the political front, where the situation continues to remain uneasy.

Global Economic Slowdown: Equity Markets in turmoil

Global economies led by Euro zone are heading towards a major slowdown/ recession. The economic factors emanating in India are also indicating a significant downturn in India's growth prospects in the current fiscal. The global crises in the long run needs to be tackled through fiscal measures such as tax cuts and creation of employment opportunities. But the G-7 countries have tried to address the issue by printing currency, which is fuelling inflation in the Asian economies. Another round of quantitative easing (QE) may be a stop gap arrangement to address the issue, but it may have long term negative impact on a sustained economic recovery. Default by several Euro zone countries like Greece, Spain, Italy is looming large at the current juncture.

In India, inflation continues to be closer to the double digit levels, forcing the Central Bank to continue with the unabated rate hikes. This does not auger well for India Inc. as the profitability of companies will be under severe stress. Another round of rate hike is definitely on cards on the 16th of this month. The dismal IIP data released today reflects the slowest growth in factory output in the past 24 months. Indian equity markets are trading at 14-15 times forward earnings at current levels, which is expensive on a comparative basis with the other Asian peers. The premium that our markets command is bound to get corrected with an impending slowdown in the Indian economy, unless some drastic policy measures are initiated by the Govt.

Our equity markets are likely to remain highly volatile in the near term. The major indices are likely to retest their recent lows (4720 on Nifty, 15700 on the Sensex).  Investors are advised to keep a watch on these levels, and if the markets decide to consolidate around these levels it may prove to be a decent investment opportunity for the long run. The focus should be on investing into those companies that have a minimum debt on their books, because they are the ones that will survive a major earnings downgrade. Corporate earnings for the September quarter, which would start flowing in a months time would confirm this view. Meanwhile, the markets would continue to be governed by global economic news.

'Off Season Sale' on Dalal Street: Pick your Bargains

Newspapers are abuzz with announcement of Bargain Sales. Hoardings around the city greet you with amazing offers. It appears that the entire nation has been gripped with the 'Sale Mania'. Very soon Dalal Street will also join the 'Great Indian Equity Market Sale'. The dark clouds on the horizon are a precursor to a Tsunami hitting the Stock market soon: Another interest rate hike in India is imminent soon, The Govt. is heading for a final showdown with the opposition. In other parts of the world the financial crisis is likely to take a heavy toll.  Historically too, August-September have been lean periods for the stock markets world over. All these factors are a pointer towards the 'Great  Indian Equity Market Sale' opening up soon. Mind you once that happens everybody would be telling the investors to quit, as if the world is going to end soon. Smart investors are advised to ignore the doomsayers advise and indulge in 'Bargain Hunting' at that time.

I am expecting our markets to stabilise and consolidate in the range 4750-4950 on the Nifty, corresponding to 15800-16400 on the Sensex. Smart investors are advised to pick their bargains during this period, any fall below these levels should be considered as a bonus. We should approach the markets just like we approach a Sale. First, we must convince ourselves about the genuineness of the sale price, scrips that have been artificially boosted before declining should be avoided. Secondly, investors should focus on 'Quality', some quality stocks are also available at reduced prices during the Sale. Thirdly, stocks should not  be bought at one go, one must keep on adding small lots on every decline, remember the prices are continuously slashed towards the end of the clearance sale. The trapped operators in stock markets offer stocks in 'distress sale' due to liquidity crunch and margin calls. That is the time to make a killing.

From the fundamental perspective, the risk-reward ratio would turn extremely attractive at the above indicated levels, when our markets would be available at 13-14 times forward earnings, after factoring in the slowdown in the earning potential of the companies. Entry at these levels would ensure that the investors earn a decent return of 15-20% CAGR and above for the next 2 years. However, the chances of the markets going down further up to the levels of 4300-4500 on the Nifty are a distinct possibility in case of a bigger global turmoil. But investors should bear in mind that it is virtually impossible to catch the markets close to the bottom, because the recovery from the panic bottoms are equally fast. Please prepare yourself for the opportunities, as indicated above.

Dark clouds on the horizon: Where is your 'Umbrella'!

We saw it coming, yet chose to ignore the reality. Today analysts are screaming about the market mayhem and the crisis that plagues the world markets. But the seeds of this crisis were sown much earlier. To understand this situation we need to understand human psychology and more precisely 'Investor psychology'. It is a human tendency to delay the inevitable, we continue to be in a state of denial till we are forced to accept the reality. Consider this:

• The Greek debt crisis was unearthed at least 9 months ago, but we waited all this while to appreciate the depth of the 'Eurozone crisis'. More and more nations including Spain and Italy are today being labelled as 'Economies on the verge of collapse', threatening the very existence of Euro as a common currency.
• The US debt/ liquidity problems came to the fore almost a year ago, but were conveniently pushed under the carpet in the garb of 'Quantitative Easing' commonly referred to as QE1 and QE2. The artificial liquidity pumped into the markets was like giving oxygen to a critical patient. Today everybody is talking about a 'Double Dip' recession in the US.
• The Commonwealth Games scam was reported in media in September 2010, even before the start of the games, closely followed by the CAG report on 2G scams. The Indian markets conveniently underplayed the collateral damage to governance for almost one year. Today the threat to the existence of UPA II has become a reality.
• The menace of inflation in India started raising its ugly head since June 2010, but the Govt. continued to maintain that inflation will be tamed soon, only the date getting extended every time. Inflation still quotes around 9% with the chances of a double digit inflation staring the economy. The Indian economy was tipped to grow at over 9% at the beginning of the decade, despite bottlenecks. Today analysts are sceptical of even 7.5%.

Sounds quite illogical and funny at times, but that's the way humans behave. This is a subject matter of 'Behavioural Finance' which tells us about the irrational behaviour of 'Investors'. Today the newspapers/ media are filled with negative news on markets, scaring the already confused investors further. What should the investors do at this juncture:

First and foremost, the investors must realise the fact that the party on 'Dalal Street' is over for the time being. Equity markets have slipped below the tight range of 5200-5700 on the Nifty. The market has confirmed a trend of lower tops and lower bottoms, the VIX (volatility index) has zoomed 25% on Friday, which shifts the new range of the markets downward to 4800-5300 in the medium term. However, the markets are likely to give a bounce of around 4-5% during next week, due to short covering. It should not be construed as a sign of strength.

The movement of the markets during next week is likely to be governed by global news. As I write, there is news of downgrade of US sovereign credit rating from AAA to AA+ by S&P, leading to more problems for the world's largest economy. The silver lining for Indian economy is that we may benefit from this mayhem in the long term, but we will have to swim with the tide in the short to medium term. Hopefully, the rebound will come once the governance issues are sorted out in India. But it may take a couple of months for the dark clouds to give way to sunny days, investors are advised to keep their Umbrella ready (Umbrella here would mean 'Cash' to overcome the crisis)

Stern warning by RBI: Markets must read the signals

RBI has finally decided to take on the inflation menace head on, and our markets must take cognisance of the essence of the stance taken by RBI. Despite the lip service by the Govt. in taming inflation in the past, inflation has moved from strength to strength in the past 18 months. The recent move by RBI should be seen as a very positive move to fight inflation, even at the cost of sacrificing a bit of growth in the short term. The hike of 50 basis points in Repo and Reverse repo rates announced today will be the main driver for the markets in the short run.

Bond yields have firmed up to 8.44% immediately after the announcement of rate hikes. Equity markets have also reacted sharply on the downside, shrugging the unwarranted euphoria of the past few weeks. The hardening of interest rates is bound to have a negative impact on the overall corporate earnings for FY 2011-12. The equity market valuations will be re-rated downwards in the weeks to come. The chances of an imminent crash in equity markets are fairly high given the overall global uncertainty. The major indices, which have been range bound for last 6 months, are likely to break the range on the downside in the coming 1-2 months. The correction could be in the range of 15-20% from the current levels. What should the investors do in this scenario?

• Long term investors can hold on to their stocks, if liquidity is not a concern.
• The market reaction to the monetary policy should be utilised to get rid of stocks that have come out with poor results. Stocks with high exposure to debt should be avoided.
• Investors who lack liquidity may sell at least 25% of their portfolio to generate cash, which can be utilised to buy the same stocks at lower levels, when the markets react.
• The focus should be on creating a buying list of stocks that have come out with good results, so that they can be bought on dips.
• The 'Risk-reward ratio' at the current market levels is not attractive for fresh equity investment. If one is looking at a one year growth of 20% or more in the portfolio, which an equity investor should look at, one should look for investment in the range of 4800-5000 levels on the Nifty, for a target of 6000 and above in one year.
• Interest rates on deposits for shorter tenures will see significant hikes in the near future, it may not be a bad idea to put some money in fixed deposits/ bonds for the next few months.
• Profit booking may be done at any bounce in the markets, in the range of 5600-5700 on the Nifty, which is the upper end of the current range.

The next few weeks are likely to see testing times for equity investors. Investors are expected to hold their nerves in the falling markets, and take a decision to invest in equity markets for long term when markets react on the downside. The Indian economy is likely to bounce back strongly in 6-9 months time when the inflation will be tamed and interest rate cycle peaks out. Remember, the 'Mother of all bull runs' is yet to unfold in the Indian equity markets, let us get ready for it.

Investors are Bulls at heart

Psychological studies reveal that investors are bulls at heart, and why not, the structure of our markets enables them to make more money on the upside rather than downside. Typically, bull phases last almost 2-3 times the bear phases. The last 2 bull phases would confirm this view: One of the longest bull phases on Indian bourses lasted 44 months from June 2004 (Nifty around 1500) to January 2008 (Nifty 6357). The ensuing bear phase was over in 10 months in October 2008 (when Nifty bottomed out at 2253). The next bull phase lasted around 25 months (Nifty topped at around 6300 in November 2010). Since then we have been witnessing a bear phase which is likely to get over by August-September 2011. Nifty which is currently trading at over 5700 is in the last phase of the ongoing bear market rally, which will give way to the impending bottoming out process which could take the indices down by 15-20% from the current levels.If we look at the brokerage recommendations the buy calls out number sell calls by 4:1. This also strengthens the view that long term investment in equities is always rewarding for the investors.

But It is always advisable for investors to keep on booking their profits from time to time to benefit from the wild swings in the markets. Indian stock markets are more volatile than markets in US and Europe, because of the shallow nature of our markets. Our markets are more prone to liquidity adjustments because they are by and large ruled by  Foreign Institutional Investors (FIIs) including short term hot money pumped by hedge funds. The current bout of bear rally has again been fuelled by this hot money, despite extreme dark clouds looming on the economic scenario in India and abroad.This makes the risk reward ratio in equity investment unattractive from a 9-12 month perspective. Investors who have made reasonable profits can consider partial profit booking at Nifty levels of 5700 and above, because the next fall could be severe. Despite this view the markets may show some strength till the middle of August, fuelled by better results declared by a few companies.

It would be interesting to look at the factors that could influence the sharp fall in our markets:

• Lack of Governance: the Govt. may give indications of some reforms as well a cabinet reshuffle soon. But come August, the Parliament session will ensure that the governance will be relegated to the background. The govt. is likely to face renewed embarrassment on the issue of tackling corruption. In fact, we can expect the extreme eventuality of a change in Govt. in some form before the end of the year.
• Liquidity crises: The present upswing in our markets is fuelled by excess liquidity. The liquidity situation is likely to reverse soon with the worsening of the crises in Euro zone and the gradual withdrawal of QE2. The flow of hot money from safe heavens like Mauritius could slow down keeping in view the regulatory changes in the offing.
• Real estate crash: A crash in real estate market, specifically in the housing sector, is long overdue. Once this happens there will be a huge negative sentiment on the equity markets. The chances of defaults in this sector are fairly high, considering the huge debt accumulated by a large number of Realtors. Only those construction companies would be able to survive the crises that have diversified into commercial real estate and infrastructure creation.

However, all the above factors would be extremely positive for our economy in the long run. Considering this, the next downturn in the equity markets will be a precursor to the 'Mother of all Bull runs' which would give an opportunity for massive wealth creation for investors. Investors should be guided by the age old adage 'Make hay while the sun shines', book profits at current levels and create liquidity for buying at lower levels.

Don't Press the Panic Button: It's Time to Churn the Portfolio

Whatever happened on the Indian stock market on Monday 20th June was inevitable, however, the reasons chosen by market participants to hammer down the stocks was an aberration. But that's the way markets tend to behave if we try to understand it from the 'Behavioural Finance' perspective. The sharp knee jerk reaction to the news on Indo-Mauritius Tax Treaty can be explained through behavioural biases which market participants tend to follow. The reaction of Monday was a result of two commonly observed biases;

1. Availability Bias: Investors tend to heavily weigh their decisions more towards recent information which is widely available in the public domain. Availability is affected by various factors such as source of information, ease of remembrance, reaction time. Very often market participants overreact to new information leading to a dis-proportionate movement in market indices. The news on the review of Indo-Mauritian Tax treaty is as old as 3 months, and even if the changes are agreed to between the two countries the same will be implemented with a time lag of at least 6 months. The market reacted the way it did because of the reasons explained above.

2. Herd Mentality: It is the tendency of an individual to mimic the actions of a larger group, without bothering whether they are rational or irrational. The reasons for herd mentality are: i) a large number of people cannot be wrong, ii) social pressure of conformity. Investors influenced by the herd mentality constantly buy and sell their holdings based on the current investment trends. The initial reaction by a few FII's on Monday was to take advantage of the news on Indo-Mauritian Tax Treaty and press for stock sale, soon the herd mentality gripped the market and within seconds the stock indices started tumbling.

However, there is no need to press the panic button. I continue to hold a view that the markets are going to go down in the medium term, but that will not happen in a hurry. On the contrary, what has happened to the markets on Monday is extremely positive in the very short term. The markets in panic did touch their immediate support levels of around 5200, albeit briefly, on Monday. There is a very strong possibility of a strong rebound in the coming weeks which is likely to pull the market back to around 5450-5500 levels on the Nifty or even higher. But investors are advised to book profits on every rise in the momentum stocks, the likes of GTL group stocks which crashed by 40-60% in just one trading session. The list of such stocks is endless. The front line indices may go down to 4800-4900 levels on the Nifty, before the next bull run resumes. If that is going to happen, the probability of which is quite high, the Mid cap and Small cap indices may tank up to 15- 20%. But, as I said, this is not going to happen in a hurry. The events likely to trigger such a slide could be:

• Fall/ Major shake up in the Central Government: You cannot afford to overlook this scenario anymore with the kind of mess the Govt. finds itself at this juncture. If at all this Govt. has survived this long is through the generosity of the principal opposition party, which is in the middle of an even bigger mess.
• Real Estate Crash: A bubble seems to be forming in the real estate sector. When this bubble will burst is any body's guess. Real estate growth is sustained in an easy liquidity scenario, a real estate crises is waiting to happen once liquidity dries up. This could happen anytime when highly liquid FII's, Hedge funds take a flight out of India.

Markets on the edge: Protect your portfolio

Equity markets after maintaining a tight range for about 3 months are finally giving signals of a breakdown from the range on the downside.  The recent weekly close indicates weakness in the markets as the market is in no mood to discount good news: Crude oil prices have retreated sharply during the week and the advance tax figures of India Inc. have shown a 77% increase y-o-y. On the contrary, market has given more credence to the negative news on the Greek crisis emanating from the international arena. Retail interest in the market has waned significantly in the recent months and FII's have also started to press the panic button. RBI has given ample signals to fight inflation at the cost of growth. The Govt. is grappling with the onslaught of pressure from the opposition as well as civil society activists which has led to a paralysis in the decision making process.

The slow and steady grind of the major stock indices downwards is leading to comparative inactivity on the volumes front. The volatility during the week (measured by the VIX) has also climbed to over 20 towards the weekend. All these factors are pointers towards a short term weakness in the Indian markets. Past experience tells us that the so called momentum stocks are the worst sufferers in a prolonged downturn. Investors holding on to such news driven stocks would be well advised to lighten their portfolio. Certain defensive stocks from front line indices will be good bets to protect the investor's portfolio. 

 

The next downturn in equity markets is more likely to be caused by a catastrophic fall in the real estate prices. The pressure on the Govt. to enact the Lokpal bill and the issue of black money stacked abroad is the primary reason for the impending realty prices crash. This issue can no longer be brushed aside, and the Govt. will be forced to take some corrective steps to redeem its credibility. The Competition commission is aggressively pursuing cases of complaints against some top real estate firms regarding malpractices in their affairs with buyers/ investors. Once this happens, there is fear of a severe liquidity crises in the markets leading to a further downfall in stock prices due to lack of buying support. Before this scenario unfolds, it would be wiser to have a closer look at your portfolio and take suitable remedial measures to protect it from a major downside risk.

 

India poised to become a major 'Manufacturing Hub'

India is poised to overtake China as a global manufacturing hub. Fortune 5000 global companies have shown their preference for India for outsourcing manufacturing over the next 3-4 years. With a host of these global firms setting up manufacturing facilities in India, the manufacturing sector may overtake the services sector as the major contributor to India's GDP in the next 5 years. India with its manufacturing, engineering and technological capabilities offers a conducive environment to qualify as a global manufacturing hub, provided it can overcome the political impasse and getting along with the economic reforms agenda. I am very sure this will start happening in the next 5-6 months.

Currently, India's GDP is dominated by the growth of the services sector, prominent among it being BFSI and IT sectors. But a change in trend is beginning to emerge. Historically it has been proven that a services led economic growth invariably leads to a collapse, as it has happened in the case of Iceland and Portugal. Even the Lehman brothers episode gave a big jolt to the US as a services led economy. Countries with a strong manufacturing base like China and India are likely candidates for a more sustainable economic growth.

What could be the impact of India transforming into a 'Global manufacturing hub' from a 'Services dominated economy'. Our markets will sooner than later accept this reality and re-rate the stocks from various sectors. The future belongs to the real economy rather than the virtual economy. In the emerging scenario investors are advised to focus on accumulating blue chip stocks from the manufacturing sector, and at the same time reducing exposure to service sector stocks like BFSI and IT. The next bull run which is likely to start unfolding in the second half of FY 2011-12, in all probability will be led by the real economy stocks - Domestic and foreign companies having a substantial presence in manufacturing sector. Most stocks from this sector including blue-chips like BHEL, L&T are languishing at their 52 week lows. As the markets are down and likely to remain in a subdued mode for another 3-4 months, investors with an eye on the future can start accumulating the manufacturing sector stocks which include steel, cement sector stocks which will be the indirect beneficiaries of the growth in manufacturing sector.

Dull phase in Equity Markets: Testing times for Investors

A dull phase in life can be quite a challenge. Human beings by nature love and enjoy action: We admire the gushing waves of the sea, we also get pleasure in admiring the snow capped mountain peaks, but we seldom derive the same satisfaction by watching the barren land. Equity market investors also strive for action, because the swings in the market enable them to make money. Dull phases in equity market can be quite nerve wrecking for the investors. The markets are currently passing through a dull phase and investors must learn to cope with this phase. Market analysts call such phases as 'range bound movement' or 'consolidation phase'. What should one do in a dull phase:

• Take a break from the market: It is better to take a few days break from the markets rather than watch your portfolio move in a narrow range. This would help you to keep boredom at bay, because the more we think about the listless market, the more frustrated we get.
• Reshuffle your portfolio: The dull phase should be used to get rid of the dud stocks in the portfolio with blue chips. The blue chips have a better chance of outperforming the markets when markets resume their trend.
• Increase the cash levels: Dull or flat markets do not deliver a return on your capital, hence trimming the portfolio and increasing the cash levels/ debt exposure can see your capital earn reasonable returns. The surplus cash can be redeployed in equity markets once a trend reversal is evident.

Our equity markets are likely to follow range bound movement for a few months from now (say the next 4-5 months). The broad range being 5200-5700 on the Nifty. The range can be broken decisively on either side with the global news flow. The positive triggers would be: Normal monsoon, cooling of inflation, return to governance by the Govt. The negative triggers bothering the markets are: Withdrawal of stimulus leading to liquidity crises, political instability in the country, defaults in global markets etc. Let us bide these testing times without getting ruffled too much, because good times are likely to return to the equity market in about 6 months time. We need to be patient to reap the fruits of equity investment.

The ‘Exit option’: Use it judiciously to make money

The very essence of ‘Investment’ is to make money or create wealth. In this context, it is equally important to use the exit option (sell decision) judiciously as it is important to make an investment decision. Be it investment in stocks or mutual funds it does make sense to make a sell decision at the opportune time. The sell decision may result in a ‘profit’ or at times could result in a ‘capital loss’. The decision should always be influenced by the long term health of the portfolio. It is comparatively easier to book profits as one is taking money off the table. But, it is a painful decision to exit at a loss because nobody wants to destroy capital. But then, sometimes this painful decision needs to be taken if one is to protect the portfolio from higher risk in the future.

It is unfortunate that most advice is available to buy into a stock or a mutual fund, but seldom do we find advice to sell your holdings. Perhaps, it is not in the interest of the mutual fund company to give a sell call at the cost of running down its AUM (assets under management). Similarly, brokerages also focus more on buy calls and sell calls, if any, are put up for the short term traders only. Investors also tend to spend a lot of time on reading research reports, searching websites before taking a decision to invest. But seldom do we keep track of our investments to look for the appropriate time to exit or dis-invest. Does it mean that an investor should stay invested for a lifetime! Learning to use the exit option for ‘profit booking’ and at times for ‘loss booking’ is an art which every investor must learn.

Here are some key factors an investor must analyse in order to exit his/her holdings (individual stocks or mutual fund schemes):

• Relative performance: If the stock/ MF is under performing vis-a-vis its peers it is a time to take an exit call. The YOY (Year to year) and QOQ (quarter on quarter) performance based on declared results helps an investor to take this decision.

• Unrelated diversification: The announcement of an unrelated diversification, deviation from stated objectives in case of MF, puts pressures on the performance of the company. It should be analysed in terms of future profitability to arrive at the exit option. On the other hand backward/ forward integration of businesses helps in consolidation.

• Achievement of target: Most investors take an investment decision based on a specific target for the particular investment. If your favourite scrip has achieved its price target, it is advisable to book at least partial profits in the scrip.

• Negative news on the company/ MF scheme: Any negative news on the company/ MF should be viewed with suspicion. For example, detection of a fraudulent practice by the company, change in Fund manager of the MF scheme, should be analysed for the future impact, and an exit call taken after due analysis. In this case even ‘loss booking’ would be advisable’.

• Long term trends: Although, it is said that investors should not time the market, it is worthwhile to study the long term trends for the markets. Disturbing macro factors, uneasy economic situations invariably have a negative impact on risk assets (equity markets in particular). Such a situation should be used to press for the exit option. This gives an opportunity to sell now to buy cheap later.

Remember, equity investment is undertaken for ‘wealth creation’, one must take necessary steps to avoid ‘wealth destruction’. Exit option is a means towards achieving this objective.

Markets ride on the 'Feel Good' factor

In my post dated 20th February I had tried to focus on the mood of the investors and its impact on stock market movement. Since then we have seen a lot of improvement in the stock indices, primarily due to the positive mood of investors. The positive mood has been broadly created by two events which have been perceived as extremely positive by the market participants. The first event was an investor friendly budget, which articulated the resolve of the Govt. to control the deficit, and the other prominent event has been the spectacular win of the Indian cricket team to lift the world cup after a scrappy start. Investors would be able to analyse the steady improvement of the stock indices as India's campaign progressed in the world cup. The mood of the nation is euphoric at the current juncture, so how does it auger for the immediate future of our markets!

It is my firm belief that these events have given the stock markets an opportunity to extend their gains in the current rally that is unfolding on the bourses since the presentation of the budget for FY 2011-12. The positive news flow from the cricket field has even overshadowed an important negative event: Filing of charge sheet by CBI in the 2G scam. The market will ride on the cricket euphoria in the short term, and may even overshoot levels of 6000 on Nifty and 20000 on the Sensex soon. But the spate of bad news is likely to come back to haunt the markets thereafter. The corruption saga in India and the instability in the middle east is likely to keep the oil on the boil and inflation in India well above the comfort zone of RBI. And these factors do not hold good for the stock markets in the medium term.

Here is how investors should approach stock markets at the current juncture:

• India's growth story remains intact, long term investors should continue to hold on to their blue chips.
• Markets could react from the levels indicated above, and if investors are looking for profit booking this is the level for partial profit booking.
• Markets could temporarily go down towards 5400 levels on Nifty again, after the initial euphoria. Fresh investments should be considered at close to these levels.
• However, investment through SIP mode should be continued irrespective of the movement of the indices.

Buffetology: Mantras for Investors

The grand old investor 'Warren Buffet' was in India recently. He has once again reiterated his opinion on India as a compulsive investment destination for any investor. He has returned to India to scout for attractive investment opportunities for his companies. It would be worthwhile to revisit the investment philosophy of the legendary investor.

The term 'Buffetology' has been coined by authors Mary Buffet and David Clark in their book titled 'The New Buffetology'. The greatest contribution of Buffet to the cause of Indian investors has been his passion for bringing the gains from long term investing to the centre stage. Unfortunately, in India the focus of investment has been on making money through short term gains, which is detrimental for the psyche of investment. The idea of long-term investment is treated somewhat like a doctor’s advice to start exercising and eat healthy. Most people agree that it’s good in theory, but few actually get around to doing it. Buffet's life and his success demonstrates that all you need to do is to understand a few simple things and do them faithfully over the long-term, with the long-term measured literally in decades, not years.

Here are a few pillars of the so called 'Buffetology':

• Invest in companies companies with consistently high rates of return on equity, preferably rising.
• Rule No. 1: Never lose money.
  Rule No. 2: Never forget rule No. 1
• Invest in a business that even a fool can run, because some day a fool will.
• Time is the friend of the wonderful company, the enemy of the mediocre.
• Simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.
• You only have to do a very few things right in your life so long as you don't do too many things wrong.

Let us derive inspiration from these words of wisdom and create wealth for ourselves through the concept of 'Value investing' propounded by the legendary Warren Buffet.

Pitfalls of a Real Estate Market Crash

Is real estate market in India headed for a crash? The answer is an emphatic 'yes', and the reasons for this conviction are far too many. Real Estate prices worldwide generally follow a lag effect: they are the last to sell off in a declining business cycle and the last to revive in a recovery. The primary reason for this is that a large chunk of the surpluses generated in a booming stock market find their way into real estate investments, leading to an increase in speculative activity in the real estate sector. Stock market decline that started on November 5, 2010 (some may call it a bear phase) is now over 4 months old, but real estate prices are still to witness a significant correction. The real estate prices in India  (especially in the residential sector) have bounced back after the 2008 global meltdown, and are currently ruling at around 20-30% higher than the peaks attained during the 2007 boom. But a severe correction is not far away.

According to the analysis done by property consultants including Knight Frank: dipping sales, inventory pile up, rising debt and jittery investors (in the aftermath of various scams) is a sure shot recipe for an impending crash. The tough stance taken by RBI on roll over of loans to the real estate sector points to the fact that RBI is not comfortable with the exposure of banks to the sector. The developers have themselves to blame for the supply demand distortions in the residential real estate sector. The herd psychology of developers for constructing luxury projects have pushed the residential market towards a state of free fall. Sales in this segment have fallen as much as 70% over the past few months. Most developers have been offering discounts, concessions, freebies to sustain themselves, but there are few takers yet. It is often said that when the roadside hawker starts investing in stock market make no mistake about the market crash, similarly when you find increasing number of SMS in your mobile from real estate agents make no mistake about the impending real estate market crash. Just count the number of messages received by you recently and you would know the answer.

Having convinced about the impending crash in the real estate sector (residential market) what should an investor do at the current juncture:

• Postpone your decision to buy a second house for investment purpose or speculation (no problem if you are buying a first house), you may get a better price six months down the line.
• Do a due diligence on the builder before locking your money into an under construction property. Paucity of finance could delay the projects indefinitely.
• Stay away from real estate stocks (especially those into luxury projects), these beaten down stocks still have a long way to go on the downside.
• Be wary of financial sector stocks: They still are over owned by the market players, but a real estate crash could dent their margins considerably.

Impact of Budget 2011: Gain after the Pain

The big event has finally unfolded: Status-quo has been maintained. Equity markets gyrated in a wide range as the finance minister unfolded the budget proposals and finally settled with minor gains in the end. The budget proposals in totality are good for the long term health of the markets as there are no negative surprises. However, the markets will continue to be guided by national/ international news flow, in the short term, which continues to be negative. Let us analyse the few positives for the markets:

• Surcharge on Corporate tax reduced from 7.5% to 5%. However the tax holiday on IT companies has ended with imposition of MAT on SEZs.
• Disinvestment target set at Rs.40,000 cr., giving investors an opportunity to invest in Public sector companies.
• Foreign retail investors allowed to enter Indian equity market through mutual funds, which is a big positive for the markets.
• Distribution of subsidies in cash by March 2012 to poor users of kerosene, cooking gas and fertilisers. This will help to plug the leakages in Govt. subsidy bill.
• Spending on infrastructure has been hiked substantially by 23% to Rs.2,14,000 cr.

The downside risk to the broader market has been reduced substantially, although there will be adjustment in individual stock prices post the budget impact on their bottom lines. The markets on the downside may find good support in the 5100-5200 range on the Nifty.  Let us analyse the impact of budget 2011 on some important sectors:

• Automobiles: Budget impact is neutral, but higher disposable incomes shall continue to guide growth, but higher crude prices can spoil the party.
• Banking & Finance: The budget impact is positive, interest subvention on home loans and crop loans has been increased. Steady growth in credit will be witnessed with infrastructure funding getting a boost. But margins will be under pressure in rising interest rate scenario.
• Consumer Durables: The duty structure has remained unchanged, but higher disposable income will continue to spur growth. The sector is expected to grow at 15% during the year.
• Infrastructure: The hike in infra spending, 85% of which goes to road development, will be positive for companies engaged in highway development projects.
• Information Technology: IT companies are on the 'Mat' after the announcement of hiking the MAT and bringing SEZs under the ambit of MAT.
• Pharmaceuticals: The imposition of MAT is negative for many companies catering to export sector. Imposition of tax on Hospitals and Diagnostics is negative for health care sector.
• Real Estate: Input costs will escalate with increase in cement, steel prices. The demand-supply mismatch does not auger well for the sector. Only those companies focused on affordable housing in Tier II/III cities could benefit.

Overall, the budget is positive for markets in long run, and any dip in markets will be a good opportunity to accumulate good stocks for the long run.

Countdown to Budget 2011: Economic survey upbeat on economy

The economic survey has pegged India's GDP growth for 2011-12 at 9%. The govt. has given an indication that it will give a big empetus to growth despite the threat of high inflation looming over the economy. The new economic power index puts Indian economy at No.5 in the list of global economic powers behind US, China, Japan & Germany. However, the survey points to India living with higher energy prices, but indicating fiscal and monetary tightening to tame inflation. The biggest contributor to GDP will be the services sector which now contributes over 57% of GDP.

The survey indicates at giving basic banking licenses for MFIs and NBFCs and full license to Corporate aspirants after due diligence. This will help in scheiving the targets of financila inclusion. The survey calls for improving financial literacy among new savers so that the high savings of 34% of GDP could be channelised properly. The survey also points to the Govt. intervention in creating awareness in the pension product.The survey also emphasises the need for developing a vibrant corporate bond market for infrastructure financing. The survey pegs the total infrastructure investments of $450 during the 11th five year plan, with private sector contributing 34%.

The survey cautions against the declining per capita availability of food grains and the falling crop yield. There is a scope for public-private participation in social sectors such as health and education. The survey feels that targeted development of rain-fed areas and effective marketing links could serve as a long term remedy to check food price volatility. The survey argues about the need for a secong green revolution to ensure food security for all. The food subsidy bill of the govt. is expected to rise despite higher deficit, once the food security law is enacted.

Mood of the Nation & Stock Market Movement

I have expressed and maintained a view that India is in the midst of one of the greatest bull phases ever, but the events of the past few weeks have sown the seeds of suspicion in the minds of investors about the sustainability of the 'India growth story'. This phenomenon can be studied with the help of 'Behavioural finance'. Although stock markets return to the mean in the long run, they can show wide fluctuations in the short term. The most objective index to assess the markets is ' Price earnings ratio' which has fluctuated between a high of 28 (during the 2007-08 bull run) to a low of 8-9 (during the crash of 2009). The mean PE ratio is in the range of 14-16, which the markets are currently reflecting. Hence it is safe to assume that the markets currently are reasonably priced. The PE ratio discounting has something to do with the 'Mood of the nation' that gets reflected in the positions taken by investors in the stock markets, leading to volatile movements in our markets in the short term. Let us analyse the factors affecting the mood of the nation currently:

• Functioning of the Govt.: A spate of scams unleashed during the past few months has been largely  responsible for the negative mood of the nation. The establishment of the JPC, to be announced shortly, may lead to a short term reprieve but the investigations of the JPC will keep the political situation on the boil for at least the next 6 months. Opposition will not miss any opportunity to embarrass the govt. as the JPC probe gets underway, leading to policy decisions being relegated to the back burner. During this period markets cannot be expected to show any big up move, which is consistent with the views of the market analysts.
• Union budget 2011: The markets this time have corrected by about 15% in the month preceding the budget and hence may witness a reasonable pre-buget rally, which seems to have started. But considering that the Govt. is faced with a tight situation and is left with a little choice to reduce duties and taxes, the budgetary announcements are more likely to dent the mood of the nation. If the budget is viewed negatively by the markets, the chances of which seem high, a good sell off in markets can be expected post budget. Top performing sectors of the last bull run i.e. Banking, automobiles, IT are not expected to get any sops in the budget.
• India's performance in World Cup: Cricket is a religion in India, and the early exit of the Indian team from the ongoing world cup is sure to bring a pall of gloom on the mood of the nation. Some of you  may wonder about the relationship between cricket and stock markets, but it is interestingly true that a negative result in cricket and that too in a world cup does effect the bullishness in the markets. The hype created around the prospects of India winning the Cup will be largely responsible for a big blow to the mood of the nation in the event of India crashing out early. Given that no host country has ever lifted the world cup till date does not auger well for India's chances. If astrologers are to be believed, India can at best advance to the semi-finals. The line up for the final could be England Vs Srilanka. Srilanka can be given an outside chance as, though being a co-host of the world cup, they would be playing the final at Mumbai which is not a home venue. Things may have been different for India if the final was played in Srilanka. We may see a temporary lull in the stock markets post India's exit. But as a true fan of Indian cricket team I would still pray for India winning the world cup!

Red Alert: China 2nd largest economy, can India be far behind!

The dragon has arrived: China has dethroned Japan as the 2nd largest economy in the world. China's GDP based on 'nominal GDP' calculations at $5.88 trillion has overtaken the GDP of Japan at $5.47 trillion in 2010. In terms of Purchasing Power Parity (PPP) China is already far ahead of Japan. India will take roughly 25 years to overtake the GDP of Japan to become the 3rd largest economy, at the current projections of the growth rates of various economies of the world. However, India's GDP growth rate is likely to grow at over 9% p.a. with a possibility of touching double digits, overtaking the GDP growth rate of China by 2014.

Despite this optimistic scenario on the economic growth front, there is a mood of despondency amongst the masses of India. The negative vibes have been generated because of the happenings of the past few months: primarily due to the unearthing of a series of scams and the perceived inability of the Govt. in tackling the menace of inflation. However, viewed optimistically there is a silver lining in both these negative factors. Corrupt practices amongst the polity as well as businesses have been in existence through the past, but their grabbing the centre stage needs to be seen as a blessing in disguise. The cases against corruption have been progressing satisfactorily and hopefully will reach their logical conclusion within the next few months. This will pave the way for a cleansed polity and fair business practices. Inflation is a concern for the population at large, but the structural shift in the nature of inflation is seen as a positive outcome of the spreading of the fruits of growth to the rural India. The surplus income available with the rural masses is driving the change in consumption patterns of the Indians leading to the runaway food inflation. I am confident that with the augmentation of the supply chain over the medium term inflation will moderate. 

The growth story of India is going to continue for at least a decade or two. The people of India will have to shed their pessimism to reap the benefits of growth. A larger chunk of the $550 million household savings of the people of India shall have to be channelised into productive assets. The over reliance on FII money to propel growth needs to be corrected. The financial system (Financial institutions lead by Banks and IFA's - Independent financial advisers) has a role cut out for itself. The objective of inclusive growth can be achieved by educating the masses of India to channelise their savings into growth assets (equity market/ mutual fund schemes) and be a part of  India's growth story. Investors need to stay invested in these growth assets to reap rich rewards in the medium to long term.

Inflation plays the spoilsport again

Inflation has been spreading its tentacles on the growth prospects of the economy. This has prompted RBI to once again increase the REPO/ Reverse REPO rate by 25 basis points each. What is more significant is that RBI has maintained a hawkish stance, giving rise to speculation that further rate hikes are not ruled out in the future. The markets have taken these indications seriously, as most market men fear the rising inflation and the corresponding hardening of interest rates as a big negative for the markets in the medium term. The continuous slide in the equity markets is likely to continue for a little while longer, given the current economic scenario.

The intermediate downturn in the markets is likely to provide long term investment opportunity if the markets were to slide by another 5-10% from the current levels. Investors are advised to keep their shopping wish list ready to take advantage of the panic situation in the markets. The rate sensitive sectors such as Banks, automobiles, FMCG are likely to take a major hit in the near future, and would thus become attractive bets for long term investment. Another good opportunity for the risk averse investors would to put some money into the tax efficient FMPs being launched by the various mutual funds to take advantage of the double indexation benefit associated with the FMPs now on offer.

However, with the liquidity crunch real estate sector will continue to reel under pressure, which is likely to reflect in the downward movement in real estate prices in the medium term. Real estate prices lag the stock market downturn, hence the cooling off of real estate prices, especially the residential real estate is likely to cool off from the first quarter of next fiscal, as the Realtors will be forced to sell the residential space at a discount given their inability to raise enough resources from the markets.

Market Mayhem: An opportunity to invest for long term

Indian equity markets have gone into a tailspin in the first fortnight of 2011. At the current levels the Nifty and the Sensex have both corrected 10% from the peak recorded on Diwali day. Investors need not panic in the current situation, because this sharp fall has presented an opportunity to buy your favourite scrips at bargain prices. This situation should be seen as a "Sale" at discounted prices. The investors should approach this opportunity with the same enthusiasm as consumers throng to the retail market during a "Sale".  Investors should refrain from acting like traders, rather they need to grab this opportunity to create a long term portfolio.

The concerns on inflation and a marginal slowdownin the economy were inevitable and were visible even 3 months before, but were ignored by the market traders at that moment. Today they are being blown out of proportion to create panic amongst investors. The same analysts/ traders who were gung ho on Indian equity markets the other day are selling in panic. The markets in the long run have always rewarded the performers and punished the laggards. The situation will be the same this time too. As the quarterly results unfold we would see sharp corrections in the stocks that had run up in expectation of spectacular performances. It a good time to churn the portfolio by getting rid of the underperformers and including new stocks that have shown promise for the future.

With the Sensex and Nifty now trading at 15-16 times 2011-12 earnings the risk-reward ratio for investors has turned quite favourable. This should result in a yearly gain of around 20% from the current levels, which is quite attractive. The fixed income instruments may seem attractive on the face value, but they may still not be able to beat the inflation in the long run. Equities do remain the best bet for wealth creation in 2011 as well. But long term investors should be mentally prepared to expect another 5% downfall in the broader indices if the negative sentiment prevails longer. However, it would be safe to conclude that the current levels in the equity markets are an opportunity to start investing systematically. Investors are advised to continue their SIPs without panicking, as the growth prospects of the Indian economy remain bright as before.