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.