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.

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.