Equity: The best asset class in 2012

It may seem surprising for many, but the matter of fact remains that equity has proven to be the best performing asset class for the Indian investor in calender year 2012 with a 25% return. Indian equity markets have been amongst the top 3 best performing markets of the world in 2012. Nifty which was languishing around 4700 levels in January 2012 will close the year around the 6000 mark. Other asset classes that have been outperforming equity in the past 3 years have given a much subdued return during 2012. Gold was able to give around 10% return but much of that is attributable to the sharp rupee depreciation. Real estate returns have also languished in the single digit range with Delhi NCR recording just 7% growth and Mumbai recording  a 4% return.

 

But most retail investors still remain a confused lot and most of them may not have made money in the equity market. With the wild swings in the equity market, only the nimble footed investors who kept on churning their portfolio have been able to stay afloat. But the good news is that the worst is almost certainly over for equity investment, and the next bull run will gain firm foothold once the RBI starts reducing the interest rates. Investors must take the plunge into equity on every decline for a decent return in 2013 as well. The return on Gold is expected to be subdued in India, as the Indian rupee is expected to gain some lost ground against the dollar after March 2013. Real estate market will continue to give lack lustre returns for 2013, other than some surprises in select pockets of NCR region.

 

When to enter the equity market in order to make reasonable returns? At the current levels of around 19500 on the sensex and 5900 on Nifty the markets seem fully priced given the current earnings estimates. A fall of 10% from the current levels should be a good opportunity to enter the equity market. The fall may be triggered by negative news on the US 'Fiscal cliff' issue or the escalation of Euro zone crises. Indian economy has seen its worst performance already and is ripe for a rebound in Fiscal 2013-14. Easing inflation, Low interest rates, a stronger Rupee and stable Commodity prices in 2013 will help revive the fortunes of the Indian economy. We may see an upgrade of our GDP growth prospects in the 2nd half of 2013. Stock market is poised to take advantage of this scenario, and give reasonable returns during 2013 as well.



Equity Investment: Poised for explosive returns

Equity investors have had a raw deal in the past almost five years. The broader indices which recorded new highs of 21000 (on Sensex) and 6300 (on Nifty) in January 2008, are trading way below those levels today. It has been a volatile market ever since, where the nimble footed traders only have made profits. But equity markets are now showing signs of bottoming out and are likely to give stellar returns in Samvat 2069 and 2070.

 

Equity markets move in cycles and the tide seems to be turning in their favour now. Let us understand the factors that will trigger the revival in equity markets:

• Global Economic recovery: The turbulent times in equity markets were a direct consequence of the global economic turmoil in the past 3-4 years. US economy has shown definite signs of revival, however, concerns about the 'fiscal cliff'' remain. The Obama administration is likely to find a solution to this issue in the next six months. Euro zone is also likely to return to normalcy, despite problems of a few member nations. India and China shall be back to higher growth trajectory as inflation issues get settled.
• Interest Rate Cycle: The Interest rate cycle has already peaked in India. The Govt. of India is taking steps to control the fiscal deficit. This will result in taming inflation by the last quarter of fiscal 2012-13, and the consequent strengthening of the Indian Rupee. We should see the Indian Rupee moving towards the Rs.50 mark against the US Dollar by March 2013. This will trigger FII's returning to Indian markets in droves. Once RBI gives the signal for cutting interest rates, markets will be compelled to re-rate the growth potential of companies.
• Political Climate in India: The political climate has been vitiated with the focus on scams. The negative political cycle has almost played out and we could see the Govt. returning to the path of sustained economic growth. We could see early elections and the positioning of a progressive Govt. at the centre by the end of 2013. This would pave the way for a smart and consistent recovery in the Indian stock market.

Given the above scenario, I would be inclined to give a thumbs up to equity investment at this juncture.  Any correction in the equity markets from hereon, should be taken as a golden opportunity to invest in equity market. The markets are not likely to fall below 17000 on Sensex (5200 on Nifty). As per my conservative estimate I would put the level of Sensex at 25000-26000 (Nifty at 7500-8000) by Diwali 2014. As it always happens, some new sectors would lead the surge of the equity indices in the new bull run. I am particularly bullish on Media & Entertainment, Hotels & Travel, Export oriented sectors (Textiles & Gems/ Jewellery), Infrastructure (Roads, Ports & Logistic businesses), Power sector to lead the next rally. Investors are advised to make their portfolio with companies from these sectors. Wish you 'Happy equity investing'.

 
 

 
 

 

Investment ideas for samvat 2069

Diwali the festival of lights is also an auspicious occasion to review one's investment portfolio. Samvat 2069, marking India's official new year (The Vikrami era) has commenced on March 23, 2012. But for the business and the broker community new Samvat commences on Diwali day, when they introduce new books of account after performing 'Lakshmi Puja', the worship of the goddess of wealth. So this is an ideal time to review the wealth earned on an individual portfolio. Let us review the potential of each major asset class during Samvat 2069:

 

Fixed income Instruments: The interest rate cycle has almost peaked out and we could see a reduction of at least 1-1.5% in the benchmark interest rates till next Diwali. Bank deposits have shown a decent growth in the last year, and investors looking to invest in safe havens are advised to book long term deposits of 3-5 years before interest rates start falling. Bond market which has given a stellar performance in Samvat 2068, may remain subdued as risk appetite returns.

 

Bullion & Precious metals: Gold has lived up to the ancient proverb 'All that glitters is gold' having given around 15% return last year. Silver has also added to its lustre. But most of the gains in Samvat 2068 are attributed to the depreciation of Rupee. The Rupee has depreciated by over 12% to a level of Rs.55/dollar after briefly falling to the levels of 57/58 in July-August 2012. The fear generated out of the "Fiscal cliff' in US and the consistent support of Obama for Ben Bernanki, the global liquidity position shall remain comfortable, pushing Gold/ silver prices to new highs in Samvat 2069. Gold prices currently hovering at $1720/ounce are likely to appreciate towards $2100 mark in a years time, marking a gain of 20%. But the impact in India will be muted as Rupee is also likely to strengthen by at least 10% once the Indian govt. is able to fix its fiscal/ trade deficit. We could see rupee/ dollar parity of 50 by March-April 2013.

Real Estate: Investment in property has yielded super normal returns in the past 3-4 years. But the growth has slowed down in the later half of samvat 2068. The realty market is currently overheated due to excessive speculation. Dearth of genuine buyers in the market does not auger well for the orderly growth of this market. Social activism is exposing the nexus between businessmen and politicians in garnering real estate at rock bottom prices and then jacking up the prices artificially to make super normal profits. There has been a tendency amongst builders to offer more and more luxury projects without adequate demand to support the high prices. Real estate market, other than the affordable housing, is headed for a massive slowdown in Samvat 2069.

Equity Market: Equity market has given a return of around 9% in Samvat 2068. However, from the view point of the small investor markets have hardly moved between January 2008 to Diwali 2012. The broader indices have yet to top the highs (21000 on sensex and 6300 on Nifty) made during January 2008. This is precisely the reasons small investors have shun the market. The markets have gone up in the recent past mainly on the back of FII investments. FII's continue to be bullish on the Indian equity market. small investors are advised to follow the FII's as the bad times in the markets are over. The next major bull run will be triggered by the announcements of interest rate cuts by RBI in the last quarter of current fiscal. Markets could test the earlier top of 6300 on the Nifty during Samvat 2069. The volatility will, however, continue and the markets may move in a broad range of 5200-6400 on Nifty till next Diwali. Investors are advised to enter near the lower end of this range for a 20% return within a year. I shall discuss in detail the prospects of equity markets in my next post.

I wish all investors a very fruitful Samvat 2069.

US Presidential Election 2012: It's implications for India

Hopes are running high as US votes to elect its 45th President. Mitt Romney of the Republican Party would be the 45th President of US if he wins the November 6th electoral battle. Barack Obama seeking 2nd term as a Democratic party candidate is on a shaky wicket on the eve of the elections, despite a strong last ditch effort by former President Bill Clinton in his favour. Obama has also tried his level best to turn the tide in his favour by the sympathetic handling of the situation arising out of 'hurricane Sandy'.

What are the implications of this electoral battle for India? Barack Obama inherited a weak US economy from his predecessor George Bush, but has not been able to bring back the US economy to its past glory. Unemployment and jobless claims have risen to new highs under Obama administration, even as the economy grows at a paltry 2.3% p.a. Obama the Lawyer-politician faces a stiff test from Romney the Businessman-politician. 1947 born Romney is much older than 1961 born Obama. Will the US public choose a more experienced man over the youthful Obama?

Obama's policy towards India has been a mixed bag. In rhetoric he has defended India against its rivals China and Pakistan, but has done precious little to re-enforce his stand. His policy of appeasement towards Pakistan has left India high and dry. He has often supported China at the cost of long term US interests, for short term gains for US treasury. Mitt Romney is far more outspoken about his views on China, it remains to be seen how he behaves towards China if elected. Obama who has had a restrictive Visa regime for Indians, has been an obstacle in India's entry into certain areas in the US economy. Mitt Romney has taken a liberal view on Visa for Indian nationals. 

Although it is going to be a photo finish I shall put my money on Romney, because he could be a better option from India's perspective. A victory for Romney could provide the US economy a much needed booster with an immediate uptick in the stock indices. Indian markets would also greet a victory for Romney. The commodity markets which have been depressed for sometime could see a strong upsurge. We could see Gold and Silver prices attain new highs by year end. However, the price impact in India would be marginal as we could see the Rupee gaining ground against the US Dollar. I would expect the Indian Rupee to get stronger towards the Rs.50 mark to a dollar in the next 2 months.

Realty Bytes: Are we headed for a crash?

The Indian property market has been booming since March 2005, when the UPA government decided to liberalize foreign direct investment norms in real estate and introduced the SEZ Act 2005, and allowed private equity funds into real estate. While the sub prime crises engulfed the US in 2007, leading to a crash in US property prices and a contagion affect in Europe, Indian property prices stood firm.  Real estate in India has bucked the trend of non-performing asset classes. Property prices have outperformed equities, currency and bonds by a wide margin in the past 5 years. India ranked second out of 50 countries in annual growth of residential prices, in Knight Frank’s latest global housing price index, the average property prices rising by over 22%. The average price of the Indian real estate pie has almost trebled in the past decade. A valid question being asked by almost everyone looking for property in Mumbai, Delhi or any of the other city where real estate prices have spun out of control, is about real estate bubbles in the Indian property market. A real estate bubble happens when the cost of homes climbs unrealistically fast, overlooking the affordability factor.

 

Is the euphoria in real estate prices sustainable in the long term? The most convenient argument in favour of high real estate prices is that land being a scarce resource its demand will always outstrip supply. But some important facts discussed below deserve some merit:

• Huge inflow of black money in the Indian real estate sector has avoided a sub prime like crisis, as most lenders finance only the book value of the property which does not take into account the black money. This acts as a buffer for the lender in case of default, and also acts as a deterrent against wilful default as the borrower's actual stake in the property is fairly high.
• In a slowing economy income levels have not kept pace with the rise in property prices leading to a reduction in end user demand. The increasing presence of speculators is keeping the prices artificially high. About 65% of flats in Delhi and 35% in Mumbai are in possession of speculators according to Jones Lang La Salle.
• Rental yields at 2-3 percent compare unfavourably with fixed deposit rates of 8-9 percent. With inflation at a high 7-8%, holding on to property will become increasingly difficult given the high interest rates.
• Unsold inventories in major metros like Mumbai and Delhi NCR are giving ample signals for an impending crash like situation. A report by real estate consultant Knight Frank has revealed that Mumbai has more than 80,000 flats lying unsold. This is in addition to another 50 to 100 thousand flats which are vacant, but not available for sale. Another study reveals that over 61% of the allotted flats in Gurgaon are lying vacant.
• Builder cartels are playing games to keep the prices artificially high. A few units are released under a pre-launch plan and new escalated prices are announced at the time of official release to create liquidity for initial investors. Recent liquidity released by Central banks has been responsible for success of the builder-speculator game plan.

In the days to come the liquidity position will become tight as European crisis comes back to occupy the centre stage again. At that stage the supply and demand mismatch shall force distress sales from builders straddled with unsold inventory. As the spiral of downward trend in property prices extends, distress sales from speculators will increase the supply leading to a further fall in prices. In the given situation, property prices are vulnerable to a crash in the prime markets of Mumbai and Delhi-NCR. There is a possibility of property prices correcting up to 15-20% in these markets. Tier 2 & 3 cities may avoid a major downfall as there is still genuine buying demand in these cities.

 

 

 

Quantitative Easing (QE3): Monster Unleashed

An ailing patient already in ICU has been put on ventilator, and the world is celebrating! The ailing patient is the Euro and it is now threatening to spread the contagion affect to other economies of the world. The announcement of QE3 by US Fed chairman Ben Bernanki has sent the world equity markets soaring and Gold-Silver scaling new highs in India. Other commodities including Crude Oil are also in a celebration mood. Taking a cue from Bernanki, Manmohan Singh Govt. has also announced a few reform oriented measures terming them as a 'bold initiative'. No doubt, the markets are celebrating, but is this euphoria justified?

 

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. Following the stimulus measures announced by Draghi of ECB, it is the third time the Fed has gone to extreme measures to inflate the money supply, and thereby increase economic activity. The Fed announced its plans to buy up to $40 billion worth of mortgage bonds each month from now until the end of the year.

 

Quantitative easing may cause higher inflation than desired if the amount of easing required is overestimated, and too much money is created. If QE3 misfires US could slip into a zero growth territory as Japan suffered in the past decade due to deflation. QE3 has the potential to disturb the apple cart of economies like India who import 70% of their oil requirement. Oil prices and other commodity prices are likely to zoom as the excess money printed by central banks finds its way into the commodity markets. One asset class that is sure get benefited will be the precious metals like Gold and Silver which may touch their lifetime highs by the end of the year, as US $ comes under pressure. The Indian Rupee should show some strength but its upward movement against the dollar would be capped by the huge fiscal deficit which is likely to be around 6% of GDP.

 

The stock markets which are showing strength are ignoring the negative impact of QE3 as discussed above. Investors should take this opportunity to book some profit around 5700-5800 on Nifty, as the markets would start correcting soon as the perception of traders undergoes a change once they do the reality check. The reform measures announced by the Govt. will also face much criticism from the opposition and some of them may have to be rolled back or put on hold. The euphoria in the equity markets does not stand merit given the fragile nature of Euro zone, which will have a negative impact on Indian economy in the short term. Equity investors need to adopt a cautious approach, albeit investment in gold would be a smart choice at this juncture.

CAG Bombshell: Can the markets survive the shock?

Govt. auditor CAG has lobbed not one but three bombshells by submitting reports related to Coal block allocation, allocation of UMPP projects and Delhi airport development, putting the combined notional loss at over Rs.3,00,000 crore. The negative reaction of the press and the opposition to the reports has pushed the economy in the grip of a major crisis. The extent of damage these reports can inflict on the health of the economy is unprecedented. The basis of fixing the notional loss itself is fraught with grave consequences for the future of Indian economy. The voices of cancellation of the entire coal blocks allocated by UPA II can send shock waves for the investment climate in the country. It is like pushing the country back to the dark socialist era where private enterprise was treated as a curse for the economy. The GDP growth rate which has already slipped to 5.5% for the first quarter of FY 12-13 can slip below 5% if the current logjam is not resolved with a sense of urgency. The captains of Indian industry led by Deepak Parikh have expressed anguish at the current state of affairs.

 

I have a feeling that CAG and the main opposition party BJP will have to share the blame for pushing the country towards anarchy. History will never forgive them for the blunders committed by them. CAG on its part has presented an unrealistic view of the situation by sensationalising the figures quoted by them. Development of the country has a cost but the cost has to be calculated realistically. How can we auction a scarce commodity like coal which is the main input for producing power for a power deficient country like India. Can anyone imagine the price of a unit of electric power if the coal blocks are auctioned as per the figures put out by CAG. Will the people of this country be able to meet the increased price of power? CAG has also failed to appreciate the difference between an administrative decision of coal block allocation and the criminal nexus between govt. officials/ ministers and the private sector mining companies. The law of land is strong enough to punish such criminal nexus. Media should also focus only on such criminal acts and refrain from painting the entire picture as ugly. CAG has also woven a web of controversy around one of the best examples of PPP- Delhi International airport (DIAL). Does CAG want to say that we Indians do not deserve any world class projects!

 

The role of the principal opposition party BJP is even more circumspect. It has failed to uphold the basic tenets of parliamentary democracy leaving the parliament paralysed for several days and weeks. The cost of running the parliament for one day comes to Rs.2 crores. Can BJP tell this country who is going to bear this cost. In the bargain BJP is fast losing its credibility in public and may loose the status of the principle opposition party in the next election. BJP is primarily responsible for making mockery of the system. Its top leader L.K. Advani has already conceded defeat by tweeting that Third front will form the next Govt. at the centre, and both Congress and BJP will bite the dust in the next elections. I am afraid the time is running out for both the Govt. and the opposition to rescue the country from the mess that the political class has created. People of the country are losing their patience and the consumer confidence is touching new lows. Our politicians must rise above partisan politics to salvage the dwindling image of the country, before it is too late.

 

Even in such circumstances our equity and commodity markets have been holding on steadfastly. Gold and Silver have touched new highs due to easy liquidity being pumped by the western economies. The markets will definitely react to the political crisis in India. But the chances of a major fall is ruled out. The new range for our equity market would be between 5100-5800 on the Nifty till the end of the year. Any dip in equity prices should be considered as an opportunity to invest for long term. Luckily for our economy the monsoon has revived smartly in August and the rural demand is robust. Fall in consumer prices will be the major trigger for easing of interest rates by October end. The signals from nature and world markets are extremely positive, provided CAG and BJP can do some soul searching to help revive the fortunes of our economy.

Monsoon deficiency spells doom for the markets?

The importance of monsoon for the Indian economy is well known to the world. This year monsoon has played truant thus far, and this does not auger well for our economy and the stock market. For the first time we have the official word on GDP growth falling below the 6% mark for first 2 quarters of FY12-13, both Kaushik Basu and Montek Singh Ahluwalia have echoed this negative outlook. The monsoon deficit for the months of June-July has been over 20% of the long term average. RBI monthly review has also laid emphasis on the inflation factor which is likely to worsen in the absence of adequate rainfall. Almost 50% of our arable land is in the grip of the worse drought in past 10 years.

So far the markets have turned a blind eye to the monsoon factor, in the hope of some big ticket reforms from the Govt. World markets have also held firm in the hope of the elusive QE3 package. But these hopes are diminishing day by day and our stock markets will react to the extremely negative growth outlook sooner than later. Indian economy is plagued with an unusually high fiscal deficit coupled with high inflation and higher interest rates. In such a scenario the broader indices are likely to crack by 10-12% in the near future, but the impact would be severe on the monsoon sensitive sectors that are highly dependent on the rural demand. Investors are advised oi steer clear of these sectors: Banking & Finance, Agrochemicals & Fertilisers, Auto motives & Auto components, and FMCG.

Now for some crystal gazing through Astro analysis. As written by me in my earlier posts the first phase of monsoon was predicted to be bad. But there are signs of a recovery in monsoon rains towards the fag end of the monsoon season in the month of September. The impact of the late recovery would be seen in the performance of the companies from 3rd quarter of FY12-13, which may coincide with the much awaited rate cuts by RBI in Sept.-Oct 2012. The second half of the current fiscal could see a remarkable turn around in the fortunes of the Indian economy. Investors are advised to utilise any downturn in the equity markets to invest into their favourite scrips. In the past few years Real estate and Precious metals have given sterling performances, but 2013 promises to be the year of Equity investment.

What ails the Indian economy?

We may take solace by blaming the international developments for the mess that we have created around the growth prospects of Indian economy. The commonwealth games scam, about a year and a half ago, that laid the foundation of a policy paralysis in governance, has spread its tentacles too far and way  beyond the imagination of most analysts who were banking on the 'India shining' theory. We may take pride in the fact that we still continue to grow at 5.8% annually as compared to the widespread recession in the Euro zone. But the fact remains that we have not grown to our full potential. The average Indian has become too pessimistic about the economy, thanks to the lack of governance, and this is telling on the GDP growth. The major factors contributing to the gloomy scenario are discussed here-under:

• Over reliance on 'foreign money': Indian economy has achieved sustainable growth in the past on the back of the high savings and investment rate by the households. The savings and investment has suffered due to the cautious approach of the Govt. and lack of enough incentives to promote 'investment skills'. Most Indians still invest a bulk of their investments in unproductive assets such as physical gold and real estate. This not only hampers the availability of funds for growth but is also a big deterrent in curbing the menace of black money. The govt. on its part has not given enough incentives to the local population to encourage investment in growth avenues. As a result of this many development projects are suffering from lack of capital. Secondly, the companies that raised overseas funds to fund their growth have hit a debt trap with the depreciation of the Indian rupee.
• Irresponsible politics: The ruling party, its allies as well as the major opposition party have been at loggerheads with one another. Their irresponsible behaviour is responsible for the ongoing policy paralysis. The so called 'Civil society' movement has also played havoc with the economic decisions, as their members are now indulging in cheap gimmicks to attract public interest. These people must remember that power without responsibility is even worse than the corruption issues that they are highlighting. The decision making process of the govt. has been virtually suspended due to illogical threats by the alliance partners. An example: The inability of the Govt. to raise diesel/ cooking gas prices has lead to a distortion in fuel prices, with petrol and diesel price differential leading to confusion all around. Infrastructure, Power and aviation sectors are bleeding due the indecision by the govt.
• Inability to curb 'Food inflation': Govt.'s inability to curb food inflation has created a situation that is keeping the interest rates high and putting undue pressure on the Indian Rupee. Adequate steps are not being taken to overcome supply side bottlenecks, on the other hand raising of MSP for crops is fuelling food inflation. Most of the benefits, such as fertiliser/ seed subsidy, intended from small farmers are actually being used by middlemen.

The only saving grace for the GDP growth of Indian economy has been the services sector which continues to grow at a double digit level. With industrial production dipping into negative territory for March '12 and agriculture sector stagnating in the 2-3% range, it will be extremely difficult to achieve a growth rate of 8-9% in GDP numbers. The Govt. needs to encourage investment by Indian citizens rather than waiting for foreign investors to lead the revival.

Bad phase for Risk investment: The bad phase for risk investments is likely to continue a little bit longer. While international commodity markets have cracked, equity and real estate markets ate still holding on. Any negative cycle in global markets is not completed till real estate prices correct substantially. Investors can look forward to a substantial correction in real estate market as supply-demand distortions reach dis-proportionate levels. Equity markets could make the final bottom thereafter. this entire cycle is likely to be completed in the next 4-6 months, thereafter it will be a smooth ride for equity markets. This could well be the final phase of the downturn which would lay the foundation of the next bull run in equity markets.

Is the India growth story over?

With the declaration of India's quarterly GDP numbers last week everybody is asking whether the India growth story is over? The situation has a number of similarities with the gloom that prevailed during the latter half of FY 2008-09. India's GDP for FY 2011-12 has plummeted to 6.5%, lowest in last 7 years and even lower than 6.7% recorded during 2008-09. The Jan-Mar '12 quarterly growth comes at a paltry 5.3%, way below expectations of analysts. This led to a prompt call by international rating agencies for further downgrades in earning prospects of Indian economy for future quarters.

Investors are turning jittery as their portfolio's bleed. At this juncture, I would like to reassure the investors that this is not a good time to exit equity and other risk assets, but to prepare towards building a decent long term portfolio in the ensuing downturn. I always maintain that one's ability to analyse the future with reasonable accuracy is the key to make money in equity markets.The reasons for the current gloom in the markets was analysed by me and advised to you during by blog posts in the past 3 months, and presently all of those negative factors have almost played out as detailed below:

• Governance deficit/ policy paralysis has taken its toll on the GDP numbers. We have gone through a tough phase in Indian polity with a lame duck govt. and an irresponsible opposition playing havoc with economic issues.
• Indian Rupee has weakened the most amongst peers as it touched a lifetime low of 56.5/ $ during last week.
• Inflation continues to be stubbornly high, with food inflation refusing to come down. This leaves little room for RBI to lower interest rates.
• Global slowdown has accelerated further, with Euro zone crises coming back to haunt the markets. Chinese demand slowdown has hit the scenario of commodity demand tapering off.

However, when we have a closer look at the above issues, we would be able to see a silver lining for the future. With the Govt. pushed into a corner by the opposition and its allies, it may see it as a last opportunity to salvage its position with some bold reformist measures. We could witness a slew of reforms after the conclusion of presidential elections in July. Indian rupee after a massive fall is now poised for a consolidation in the 54-56/ $ range, given the oversold market conditions. Inflation will slowly start to move down with the progress of monsoon, and the fall in prices would accelerate after September '12. The euro zone crisis will act as a boon for Indian economy, with investors returning back to Indian risk assets once Rupee starts strengthening and inflation coming down. The fall in global commodity prices, especially crude oil augers well for Indian economy.

Future of Equity markets: Indian equity markets would enter into a consolidation phase now. The market is likely to consolidate around 4700-4800 levels on Nifty and the consolidation phase is likely to continue for next 5-6 months, after which there is likely to be a sharp upturn in India's fortunes. In the worst case scenario the markets are unlikely to fall below 4531 on Nifty (the lower bottom made during Dec.'11). Investors are advised to use the fall in markets for accumulating blue chip stocks: Example: BHEL/ L&T quoting at their historic low PE multiples.

Future of Commodity markets: As indicated by me in the past, precious metals like Gold/Silver have ruled firm in Indian markets, due the support extended by depreciating rupee. With the rupee depreciation having played out markets for precious metals may slide substantially during the next couple of weeks. Crude Oil has already slumped over 20% from its peek.

Equity investment will be best bet in Samvat 2069

With the pall of gloom setting on the economy investors have started pulling out money from the Indian equity market. There is a panic situation engulfing the equity markets. If past history is analysed such situations lay the foundation of a sustained bull run. The most important mantra for making money on the stock market is one's ability to predict the future events with accuracy. Stock markets always discount the future in advance. As I had indicated in my last post, the situation was turning grim for the equity markets. The markets at the current levels of 4800 on Nifty and 16000 on the Sensex have already met my targets. But there is still some more pain to come. Indian rupee has dipped to 54.50 against the US dollar, and is likely to move further towards 56-58 range as indicated by me earlier. Let us try to analyse the movement of equity markets during Samvat 2069.

The Hindu calender year Samvat 2069 has commenced from 23rd March 2012. Samvat 2069 promises to be a year of extreme volatility for the Indian economy as well as equity markets. The prices of essential commodities will continue to rise rapidly, putting pressure on our fiscal situation as well as leading to volatility in the rupee vis-a-vis US dollar. The dollar will also continue to appreciate due to its safe haven appeal as Euro zone totters. The current volatility in stock market is a result of the movement of Jupiter from Aries to Taurus. This transition period that started from 4th May 2012 will continue up to May 29th. Equity markets are likely to make a bottom during this period. The current bottom is likely to be higher than the level of 4531 on Nifty which the Nifty touched in December 2011. Once a higher bottom is confirmed, equity markets would return to some stability after 29th May 2012. Thereafter it will be a phase of prolonged consolidation for our markets with markets moving in the 4700-5400 range for the next 4-5 months. A sustained uptrend is indicated only after 14th November 2012. Samvat 2069 also promises that equity indices will touch their previous high (6300 on Nifty, 21000 on Sensex by March 2013).

Retail investors must utilise the current opportunity to enter equity market with a 1 year plus perspective, and do not panic during the ensuing volatile phase to make excellent profits during Samvat 2069. The reasons for Indian equity markets returning to their past glory after November 2012 are analysed below:

• Rupee would start strengthening after making lows of 57-58. It is likely to come back to levels of 49-50 by March 2013.
• Inflation, specially food inflation, will start its downward journey from October 2012, after a good spell of monsoon in the 2nd phase, drought conditions are likely to prevail up to June 2012.
• Major industrial commodities will lend stability to markets. Crude Oil shall continue its downward spiral easing pressure on India's BOP situation.
• RBI will have to postpone its next rate cut till October- November 2012. Consequently, the quarterly results of India Inc. would show an uptick only from December '12 quarter.
• The govt. would show some semblance of stability after the completion of Presidential elections. The possibility of a mid-term election, if any, shall also be resolved by November 2012.
• Major electoral processes world over shall be completed by January '13 with the US presidential election, this would lend stability to the world markets.

Keeping in view the above analysis, investors may get into equity markets now, provided they can tide over the consolidation phase over the next 4-5 months. The risk reward ratio at the current levels is extremely positive, with the downside restricted to 5% and the possibility of a 30% gain from current levels in the next 9-12 months.

Dark Clouds over Indian equity market

Indian equity investors have had a roller coaster ride in the past one year. The so called long term investors, who have been holding on to their long term bets, have borne the brunt of the damage. Our markets, with heightened volatility, have turned into a traders delight. In range bound markets it is the nimble footed traders who make money. The current logjam in the Indian economy is likely to extend a little while longer. Despite the much awaited rate cut bonanza announced by RBI last week, the markets continue their lack lustre performance. The reasons for this gloomy scenario are for everyone to witness, and now international rating agency S&P has also put its stamp on the gloomy outlook for Indian economy in the short term.

While traders make merry in a volatile environment, investors seem to be a worried lot. Where are our markets headed from hereon? The current scenario has turned extremely negative for growth, as highlighted by S&P:

• The reforms process has taken a back seat as the governance deficit continues, due to pressures by Govt. allies like TMC.
• The current account deficit is putting pressure on the system: Leading to build up of inflationary pressures on the economy once again.
• The Indian currency continues its downward spiral. If we believe analysts, the Rupee may slip to 57-58 levels to a dollar fairly soon.
• Crude Oil prices continue to firm up, which is putting pressure on our BOP situation.
• FIIs have started pulling out money due to the current unresolved legal issues.
• Major global markets, other than US, including China are pointing towards a global slowdown, leading to drying up of liquidity.

Indian equity markets are in the midst of the annual earning season. Most company results have shown that profits of India Inc. are under pressure despite growth in sales. The outlook for major sectors: Financials, Oil & gas, Power, Infrastructure & real estate & IT have turned negative in the short term, leading to pressure on the markets. Defensive sectors like Pharma & FMCG may lend some support to the markets. The major components of our major indices: Reliance, BHEL, L&T, Infosys and the Banking lot are likely to put pressure on the front line indices. The markets are likely to dip around 8-10% from the current levels, but the decline will be a good opportunity to build a decent portfolio with a one year time horizon. Investors would need to watch out for levels of 4800 on the Nifty/ 16000 on the Sensex in the next 1-2 months. It would be a good opportunity to bet on precious metals- Gold & Silver at the current levels for decent gains in the short to medium term. Rupee depreciation will help keep prices of gold/ silver high in India.

Budget blues for the markets: Mamata factor spoils the party

The past week has been a hectic week for the Indian markets. Two of the events - The credit policy and the General budget turned out to be non events, and the third event - A bold railway budget was held to ransom by "Mamata didi'. The UPA government seemed to be succumbing to Didi's dadagiri, creating an embarrassing situation of sacking of the railway minister immediately after presentation of the rail budget. The political situation has taken a turn for the worse and it would be futile to expect the govt. to restart the reform agenda. This would be seen as a major negative by the investor community.

 

The markets, as expected, gave a lukewarm response to the budget and the decline post budget is likely to continue for some time. However, the excessive liquidity in the market will act as a deterrent for a sharp decline. From now on, international liquidity and last quarter results of India Inc. would decide the short term course for our markets. The markets are expected to trade in the range of 5000-5600 on the Nifty for the next 2-3 months. However, the markets having made a bear market bottom in December 2011 at 4531 on the Nifty, the long term trend remains up. It is a buy on dip market, and investors are advised to enter the markets around 5000 levels on the Nifty.

 

The Union budget for 2012-13 would be monitored closely by the analysts as far as the fiscal deficit is concerned. It will be interesting to see how the Govt. moves towards reducing a fairly high subsidy burden. The budget proposals are also inflationary in nature in the short term. This would delay the rate cut hopes from RBI. The markets would thus be sceptical in the short term. However, the lack of any negative surprises in the budget bodes well for the markets in the long run.

Election results a blow to UPA: Markets to remain subdued

It is Holi mood on Dalal Street and red colour is splashed all over - on the broker screens/ investor books. The state assembly electoral hustings have dealt a huge blow to the UPA Govt., and have cast serious doubts about its ability to complete its full term. Equity markets, after the initial euphoria, have given a thumbs down to the results. The correction in the markets that was already underway will gain further momentum in the short run. This correction is a blessing in disguise for the investors who are sitting on cash to take entry into the markets at lower levels. As indicated in my last post the worst is over for the markets, and a bottom has been made at the level of 4531 on the Nifty in December 2011. The next downturn is likely to create a higher bottom around 4700-4900 levels on the Nifty. This would lay the foundation of a grand and sustained bull run in our markets, which will unfold in the New samvat 2069 starting on March 23, 2012.

The negative global factors are also playing a negative role in pulling down the markets:

• Greece and some other Euro zone countries are again hogging the limelight, a default seems imminent.
• Escalation of Iran- Israel conflict is keeping crude prices on the boil.
• Rupee has weakened by around 5% and this will add pressure on the fiscal management by the Govt.
• Slowdown fears in China have spooked the global equity markets

In the above circumstances money is likely to move out of risk assets and may move to save havens like US treasury and precious metals. Equity markets have the potential to correct up to 10% from the current levels. But this presents a good opportunity to accumulate blue chips at reasonable levels. The next important triggers for the market would be RBI policy on 14th and Union budget on 16th March. Investors are advised to start putting money in equity markets around 5000 levels on Nifty (16400 on Sensex) to reap rich rewards in the next 12 months.

Wishing you a 'Happy Holi', may the colours of Holi spread happiness in the lives of investors.

Have you missed the bus! Markets always give a second chance

Equity markets world over have moved up sharply in the month of January 2012. Indian market has been the best performer during the month after a miserable December performance. The sharp rally has taken many investors by surprise and they are now wondering whether they have missed the bus! Wait before you jump on to catch the moving bus i.e. committing funds to equity at this juncture. The markets are under the influence of excess liquidity, and have moved up faster than the comfort level of most analysts/ investors, and therefore, a correction is in the offing very soon closer to the levels of 5400 on the Nifty (18000 on the Sensex).

Let us analyse the prospects of equity market movement in the current scenario:

• The good news is that the Indian market seems to have made a bottom at 4531 level on Nifty reached in December 2011. It has made a higher top and has surpassed the 200 DMA (considered as the major hurdle).
• In all probability the market will try to make a higher bottom in its next correction, which may start anytime now. Investors can expect the market to make the next bottom in the range of 4850-4650 on the Nifty.
• As anticipated by me the first positive trigger for the market came in through the RBI policy review on January 24, which cut the CRR by 50 bips, and signalled the end of the high interest rate regime.
• The next positive trigger could be the Union budget for fiscal 2012-13 to be presented in the middle of March '12. Before that the state election results could bring a positive surprise for the ailing UPA govt. It could snatch power in one of the states: Uttarakhand/ Punjab and could be in a commanding position in UP.
• The rupee has bounced back sharply to 48.70 to a dollar from 54 levels reached earlier during the month, proving sceptics wrong. It should consolidate in the 48-51 range till March 2012.
• The Euro zone crises would come back to haunt the markets intermittently, so a runaway upward movement in the markets is not possible till the second half of fiscal 2012-13.
• Analysts consensus estimates of Nifty touching 5800 by December 2012 is reasonable.
• My personal take on the markets is: After the initial correction towards 4850-4650 on Nifty, Samvat 2069 (Hindu new year starting on 23rd March 2012) promises to take the market to new highs: Investors can expect the markets to top 6300 on Nifty/ 21000 on the Sensex by March 2013.

Guidance for investors: Any investor entering the equity markets should target a yearly return of at least 18-20%. That is when the risk reward ratio turns attractive. By this logic entering the markets at 5400 does not make sense, one must wait for the market to correct by 10% from current levels to reap due rewards from equity. Anything above 18-20% should be treated as a windfall. The long term trend for Indian equity markets has turned positive and we could see a sustained bull run for at least 3 years from second half of fiscal 2012-13, if things remain stable on the political front.

About investment in debt: As stated above the interest rate cycle has peaked. Investors seeking to invest in debt should commit funds for long term (put money in bank deposits/ long term debt funds for 3-5 years) as banks will start cutting deposit rates soon.

State of the Markets in 2012: Lessons from the past

Financial advisors always recommend investment in risk assets like equity to overcome the impact of inflation on the investment portfolio. Investors who had invested in equity in the year 2011, following their advice, would have suffered a substantial erosion in their portfolio over the past one year. Many of you would be wondering what went wrong during the past year and what is in store for the year 2012. Let us first try to understand what happened during the past and draw a few lessons from history.

Understanding 'Equity Investment':

• Equity investment is for long term (3 years and above) and should not be judged from a short term perspective of one year. Bear phases in Indian equity markets have lasted typically between 12-16 months, whereafter recovery process starts. The probability of making losses in equity markets reduces substantially as the investment period increases.
• Equity markets always give a chance to book profits as well as losses, an investor should encash on the opportunities provided by the markets. One must learn to accept one's mistakes and should even be ready to book a loss on an investment which has turned negative due to factors like a change in business cycle/ govt. policy or due to unearthing of some negative news related to a particular company.
• Equity investment entitles the investor with the status of 'ownership in the company', and we must exercise restraint if the stock price is impacted negatively in the short run due to extraneous factors, provided we are convinced about the quality of management and future prospects of the business.
• Equity investments involve higher risk and should be undertaken only after proper understanding of the behaviour of the markets. One must be prepared to see a downside in the prtfolio in the short run. However, downward risk to the portfolio can be mitigated by investing in well researched companies and diversifying investments across sectors.

Analysis of the prospects of equity markets in 2012:

• The result season is going to commence shortly, and the performance of India Inc., barring a few sectors like IT and FMCG, is likely to be subdued in Q3. This would put further pressure on the equity markets. The markets, in all probabilty, are likely to bottom out anytime between now and middle of March 2012, as the bear phase that started on 5th November 2010 will be 16 months old in March.
• Equity markets typically thrive in an 'Easy monetary policy scenario'. By this we mean falling inflation followed by low interest rate regime. Inflation has started to cool off and the first trigger for the revival of Indian equity market could be the RBI policy to be announced by end of January, which may signal the start of a falling interest rate scenario. Further impetus would come with the announcement of the Union budget in the middle of March 2012.
• While some positive news is expected from the US, Euro zone will continue to put pressure on the equity markets world over. India will ultimately be benefitted in the shape of lower commodity prices as Euro zone crises escalates. The Indian rupee will start to strengthen, as inflation dips and commodity prices ease. This would indirectly lend a helping hand to the Govt. grappling with the menace of a huge fiscal deficit.

Considering the above factors, equity investments would prove to be the best bet for the year 2012, provided the investors do not panic in market downturns and commit funds to equity investments at every decline. Sectors based on Indian consumption story should be preferred and companies with large exposure to the Euro zone should be avoided for investment. I shall review the prospects of other asset classes in my next post.