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.