Markets sign off on a positive note: Crystal gazing for 2014

Indian stock markets attained new highs towards the close of calendar year 2013 after a gap of almost 6 years, and have closed the year on a positive note. The Sensex gave a yearly return of 9% and Nifty 7%, but the Midcap and Small-cap indices burnt a hole in the pockets of investors with double digit negative returns. Gold & Silver also turned bearish after attaining new heights during the year. But the coming year promises to be a year of extreme volatility, as India enters in the election year.

The markets would continue to be driven by easy liquidity for the first few weeks of the new year 2014, amidst negative news on the economic front. FIIs would allocate new funds to the emerging markets to sustain the momentum. Markets have pinned their hopes on a strong Govt. led by BJP at the centre. However, the AAP factor cannot be ignored any longer. Any setback to the BJP's electoral fortunes would lead to profit booking in the markets. Although the broader consensus has emerged that it is a 'buy on dips' market during 2014, the market may fluctuate within a wide range of 5500-7000 on Nifty, and 19000-24000 on the Sensex.

Other asset classes like Bonds, Real estate & Bullion are not likely to fare better during 2014, so Equity as an asset class would be the best bet. However, investors are advised to enter the market towards the lower end of the range suggested above to reap rich rewards from equity investment during 2014. the year 2014 promises decent returns on Equity investment provided you take informed decisions. A good long term investment opportunity is likely to emerge immediately before or after the General elections due in April-May 2014. Keep your funds ready to avail this golden opportunity.

I take this opportunity to wish you all a 'Very Happy & Prosperous New year 2014'. May you reap rich benefits during the year on your Investment portfolio

Markets in election mode: Expect extreme volatility ahead

While the economy continues to be in doldrums equity markets are celebrating! Much of the euphoria stems from the fact that a majority of the analysts, including foreign brokerage houses, have heavily pinned their hopes on BJP returning to power at the centre. The markets have already discounted a victory for BJP, hence any hiccups to BJP's hopes in the run-up to the elections will lead to increased volatility in the markets. The outcome of the state polls on 8th December may spring up a few surprises as well.

 

Nifty, despite flirting with the lifetime high several times, has so far failed to clear the summit of 6357 in the current rally. Nifty is currently moving in a tight range of 5950-6300. The markets are looking expensive at the upper end of the range and are likely to break-out on the downside after the initial euphoria. The valuations of leading sectors like FMCG & Pharma & IT are looking extremely stretched at these levels. Long term investors are advised to avoid fresh investments at the current levels. The risk reward ratio will turn attractive only after a break-out below 5950 levels. Although the chances of markets seeking sub 5000 levels on Nifty are ruled out, we may see levels of 5500-5600 during the last quarter of FY 13-14. These levels would be a good opportunity to accumulate quality stocks from the sectors of the next bull run. The next bull run may be led by Energy (Oil-Gas, Power, Unconventional energy such as Wind/ Solar power), Infra & Development (Roads, Ports etc.),  & Financial sector.

 

For the coming month, the focus will continue to be on the outcome of state elections in India, RBI Monetary policy and the QE tapering announcements by US Federal reserve. The movement of the Indian rupee will also influence the market direction to a great extent. The voters may be in the process of re-defining the ABCDE of Indian polity. The 'Aam Admi' could spring up a surprise leading to a 'Debacle' for BJP and 'Extinction' for the Congress. I would prefer to wait on the side-line as election expectations lead to a shooting up of 'Vix' due to increased volatility.

Fireworks on D Street: Caution advised

It is festival time on Dalal Street: Sensex and Nifty are within striking distance of 'Lifetime peaks', hopefully the targets would be achieved in next few sessions. Where do the markets go from here? Retail investors are a bit confused about the future of the markets. The euphoria may last for a while on the back of excess liquidity available with FIIs. Majority of the analysts are now advising investors to enter the equity markets. But it is advisable to be cautious at these levels, as the risk reward ratio for investors has turned negative, at least for the short to medium term (i.e. next 3-6 months).

 

Investors are advised to closely watch the underlying indicators:

• Economic indicators: The IIP numbers and Inflation index will play a major part in deciding the future of markets. IIP numbers continue to stagnate, barring a few sectors like mining. The consumer confidence index is still lying low, as would be indicated by the slow pace of festival buying by consumers. However, rural demand is showing some signs of revival. But inflation continues to climb steadily on the back of higher food prices. The situation is unlikely to improve in the next few months, forcing RBI to pursue a hawkish interest rate regime. A sustained market recovery is not possible in such a scenario.
• QE tapering: The main reason for excessive liquidity finding its way into Indian equity markets is the decision by the Federal Reserve to postpone QE tapering. This has strengthened the Indian Rupee against the US dollar, lending stability to our Forex management. However, the threat to our currency is not completely over till such time there is a sustained revival in industrial activity to accelerate our export growth.
• Market volatility: Investors are advised to keep a watch on the Nifty Vix. After consistently hovering in the 20-30 range during the past month or so, Nifty Vix has closed at 18.39 today. The market is likely to turn volatile once again if the Vix moves above the 20 levels. The result season is still not over, and the coming month would witness Q2 numbers from weak corporates putting pressure on the Vix.

In such circumstances, investors are advised to exercise caution, and refrain from putting big money into the markets, as the threat of a reasonable correction are extremely high after the initial euphoria. Most large cap stocks are now in an overbought zone, investors may look for value in select mid-cap stocks after analysing their Q2 results. Otherwise, it's time to book profits and ensure yourself a decent Diwali bonus.



Real Estate Bubble: Myth and Reality

The real estate market in India has witnessed crazy heights because its vested interests have carefully planted the idea that property prices can never go down. The real estate boom has been fuelled by acute shortage of housing, easy availability of credit and the increasing velocity of unaccounted money. There has been a marked shift in investor preference for holding real assets (real estate, gold etc.) over financial assets such as stocks and bonds. This has been supported by continuous high inflation leading to negative real returns on bank fixed deposits.

 

Between 2001-2013 real estate has proven to be the best asset class having given an average return of 600% (Some markets like Delhi-NCR or Mumbai may have given much higher returns). At the same time rental yields have plummeted to as low as 2.5%, which is much lower as compared to developed countries such as US and Japan. Real estate prices in India are the most expensive in the world based on the per capita income of various countries. Real estate prices in India have been in a bubble zone for quite some time, but they can continue to be driven by 'irrational exuberance' for some more time due to the excess liquidity in the markets.

 

However, the following factors would lead to deflation of the 'Real Estate bubble' sooner than expected:

• End of Easy Monetary Policy: The US Federal reserve is committed to roll back QE measures in a phased manner. Excess liquidity has been used to fuel real estate prices rather than funding of industrial projects. India is faced with a huge CAD (current account deficit) forcing RBI to take excessive measures to discourage investment in Gold and real estate. This liquidity squeeze may prove lethal for real estate sector.
• Flight of PE (Private equity) from Realty sector: FDI funding of Indian real estate began in 2005. Lack of transparency in the sector has seen blatant misuse of FDI being diverted to buy new land parcels rather than funding the on-going projects. This has resulted in high leveraging on the books of most real estate companies. Rupee depreciation is playing havoc with the foreign investors who are inclined to move some money out fearing instability in the currency market.
• Flight of Un-accounted money: The real estate market has been artificially propped up by un-accounted money, using the 'Chain financing' theory. Builders announce a pre-launch price to attract such funds, and allow them to offload this inventory by inflating the prices at the time of commercial launch of the project. This theory relies on the principle that it is always easy to find a bigger fool in this market. But this game is about to end now as the difference between 'new launch' and 'resale' market has widened too much. Moreover, the upcoming elections would see the flight of un-accounted money from the real estate sector as elections in India are largely funded by this un-accounted money.
• Lack of Affordability: Over the years the affordability factor in real estate market in India has taken a hit. There is a dearth of end users or genuine buyers in the market. The speculators who have been holding on to their real estate would resort to 'distress selling' as inventory levels rise further. Currently, inventory levels (unsold inventory) in 2 major hi-end markets have reached very high levels: Mumbai has inventory levels of 48 months and Delhi-NCR 31 months against the acceptable levels of 14-15 months.

The myth that reality prices can only move upwards has been shattered, as the data released by NHB revealing that prices have corrected by 1.5-3% in the April-June quarter of 2013. The real price correction is much higher if freebies offered by builders are taken into account. The pressure on real estate prices will only escalate in the days to come. Only those builders offering 'affordable housing' will be able to stay afloat as speculators flee the markets. Going by the current trend we could see a correction of anywhere between 15-30% over the next 12-18 months, followed by a period of stagnation in real estate sector for the next 2-3 years. It could be a repeat of the 1997-2001 scenario, when real estate prices saw a correction of over 40%. Real estate does not auger well from an investment point of view for the next 3-4 years. However, those willing to buy a dwelling unit for self living may have a good time 'bargain hunting'. They are advised to look for ready to move properties in the secondary market rather than opt for new launches which may not get completed on time due to liquidity crunch.



Rajan applies emergency brakes on overspeeding markets

Dr. Rajan has once again re-asserted his claim that he is not there to collect facebook likes but to take harsh decisions, however unpopular, in the interest of the economy. In his maiden monetary policy unveiled on 20th September 2013 he has endeavoured to clear any misgivings arising out of Ben Bernanke's postponement of 'QE tapering' announced 2 days earlier. In the bargain he may have saved a large number of retail investors from entering the equity markets at the current unreasonable levels. The 'Irrational exuberance' exhibited by the markets at the behest of FIIs (fair weather friends) and unscrupulous traders had lifted the markets by 20% within a span of 15 trading sessions (Nifty had risen from a low of 5118 on 28th August to 6143 on 19th Sept.). His pragmatic policy announcements have made sure that the equity markets behave in a restrained manner. After all nothing much has changed for the economy, between August 28th and now, to warrant such volatility. Retail investors must bear in mind that markets basically move on sentiments and can show excessive behaviour on both sides (upside as well as downside).

Now let us analyse the decisions taken by Dr. Rajan in his maiden monetary policy. He has hiked the Repo rate by 25 basis points to 7.5% and at the same time reduced the rate of MSF (marginal standing facility) by 75 basis points to 9.5%. His two major concerns for hike in Repo rate have been: Controlling high inflation and boosting household savings. At the same time he has eased the liquidity concerns of the financial system by lowering MSF. There have been concerns in the market circles about growth, but we must understand that these expectations are beyond the realm of monetary policy. It is the fiscal policy of the Govt. that directly drives growth, and the govt. needs to do much more to spur growth by removing the supply side constraints, through fast track clearance of projects and controlling fiscal deficit. It was unfair on part of market participants to hope for a rate cut in the current challenging economic environment. On the contrary, we might see another repo rate hike in the next policy as it will take some more time for inflation to cool-off and the currency to stabilise.

The equity markets may still thrive on the excess liquidity due to the largess doled out by Ben Bernanki, but the markets must remember that the QE tapering has only been deferred, it may come to haunt the markets sooner than later. Indian equity markets would now be driven on the back of Q2 results which would start pouring in from 10th October. Investors still have some time to realise their profits before the equity markets start their downward journey once again. Going by the current scenario the results are expected to be dismal so investors must brace for substantial decline in indices in the medium term. The postponement of QE tapering has also given a temporary lease of life to the Real estate sector. However, I firmly believe that real estate market is in a 'bubble zone' and a crash in real estate prices in India is imminent in 2014. More about the real estate bubble in my next post.

 

 

Markets greet new RBI Governor: Strong pullback anticipated

New RBI Governor Dr. Raghuram Rajan took charge at 'Mint Street' on 4th September 2013, and the markets greeted him with a big 'Thumbs Up'. Both the front line equity indices, Sensex and Nifty, jumped by 2% and the Rupee also strengthened by as much from its lows. Dr. Rajan is taking over at the helm of RBI at a time when the economy and the markets are in a severe downturn. It is widely believed by a large cross-section of the market that Dr. Rajan with his IMF experience and the experience of having worked as the Chief Economic Advisor to the Govt., will instill confidence in the shaky Equity and Currency markets.

In his maiden speech Dr. Rajan has under-lined the following agenda:

• Primary agenda of RBI is Monetary stability i.e. to sustain confidence in the value of Rupee
• Removing uncertainty that has characterised recent RBI actions
• Giving a big push to Banking sector reforms: Removing branch licencing restrictions, speedy clearance of new banking licences, focus on addressing 'Non performing assets' of banks
• Initiate short term changes despite the risks involved
• Opening up special window for banks to swap fresh FCNR(B) deposits
• Hike in Bank's current overseas borrowing limits by 50%
• Technology up-dation: Focus on 'Mobile payments' as a game changer

These changes will go a long way in restoring the confidence in 'Monetary policy' of RBI. The markets will await the announcement of the first monetary policy by the new Governor on 20th September. Till then we can expect a smart rally in the equity and currency markets. The Nifty could speed towards my first target of 5700 in a hurry and it may overshoot this target by another 100 points if the going is good. The Rupee could also recover to Rs.60-62/$ in the bargain. But the US (Barack Obama) could play a spoilsport through 'War mongering' which could keep the markets on their tenterhooks. The markets would also eagerly await the statements of Fed chairman Ben Bernanki on 'tapering off of stimulus'. The strong pull back in the equity markets are likely to be led by Banks and other rate sensitive sectors. Investors are advised to book substantial profits around 5700-5800 on the Nifty. This may be your last opportunity for exit before the next downturn.

Economy stares at 'Stagflation': Time to take a break!

The writing on the wall was pretty clear since the beginning of the year: Indian economy was showing signs of a paralysis: The govt. has resorted to a 'shock treatment' only now when the patient has been shifted to the ICU. The steep correction in stock markets witnessed recently is merely a reflection of the state of the economy. I have been consistently warning the followers of my blog to book profits in the markets at every rise. This is what I had advised in my blog post dated 28th April 2013: "The best investment strategy in such a scenario would be to sit on cash/ bank deposits, which can be profitably re-deployed once the downturn has played out. A real/ meaningful global recovery is still at least 2 quarters away. It may not be a bad idea to sell in the markets at current levels and go for a holiday in May 2013." I don't know how many of you went for a holiday, but I did sell around 30-35% of my portfolio and went off on a holiday to Kashmir in August (could not afford an overseas holiday with the depreciation in Rupee)

 

Indian economy is now staring at the grim prospects of being in the grip of 'Stagflation'. According to Wikipedia: 'Stagflation', a combination of stagnation and inflation, is a term used in economics to describe a situation where inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high. It raises a dilemma for economic policy since actions designed to lower inflation may exacerbate unemployment, and vice versa. Although, CPI (Consumer Price Index) in India has been consistently perched above 9%, the official WPI (wholesale Price Index) for July 2013 has shot up to 5.79% from 4.86% in the previous month. On the other hand IIP (Index for Industrial Production) has turned negative for June 2013 (a negative growth of 2.2% on a YOY basis). Most economists now fear the GDP growth dipping below 5% for FY 13-14. Indian Rupee has turned extremely volatile, and extreme pessimism amongst FIIs coupled with operator driven hammering could push the Rupee towards the 70/$ level in the short term. However, the REER (Real Effective Exchange Rate) for the Rupee is around 60/$, and it would recover to these levels once the speculation in markets is played out.

 

I am of the firm opinion that Indian economy is not in the 'Pink of health' and the stock market as 'a barometer of the economy' would continuously drift lower till some positive offshoots of growth are witnessed. The broader range of the market has shifted lower and the Nifty is likely to trade in the range of 5000-5700 in the short term. Investors are advised to book substantial profits towards the upper end of this range, and wait for the downturn to play out. The markets have shown a rebound on Friday and may sustain an upward momentum in the short run, guided by the Rupee movement. A sustainable market bottom looks extremely below the current levels: The markets could finally bottom out anywhere between 4500-4800 on Nifty (Corresponding to Sensex levels of 15000-16000) in the next 3-6 months. The frontline stocks quoting at high PE multiples would bear the brunt of the carnage in the next downturn, as the mid-cap mayhem is almost complete. Investors are advised to book some profits (losses in some cases) and take a break from the markets at this juncture. A word of caution: Some of you may be tempted to shift funds from Equity to Gold, please avoid that temptation as gold prices internationally have crashed, it is only the depreciating Rupee and the increase in duty that is keeping gold prices high in India.

Economy in Doldrums: Markets in Dilemma!

The economic situation in India has turned from bad to worse over the past 6 months, and there are no clear signs when the economy shall bottom out. Core sector performance is slipping from quarter to quarter. Central bank's focus is on preventing the Rupee from falling further. But a weak currency is a mere symptom of the growing economic malaise. From a situation when we were hoping for aggressive rate cuts to happen, we are now staring at the possibility of hardening interest rates for the short term at least. Our markets have sustained within the range of 5500-6200 on the Nifty, hoping to break-out on the upside once interest rates start softening. But RBI governor has finally dashed these hopes, and in all probability the markets would appreciate the harsh reality and prepare for a break-out on the downside soon. 

Although broader markets have given negative returns in the past few months, the front line indices have held out because of index management by large investors. The markets have been able to maintain the range mainly because of a few sectors: Pharma, FMCG, IT and Oil & Gas to a large extent. But analysts are now fearing that valuations of most stocks from these sectors have become extremely stretched. This is the reason why the current down-trend has started. But, the bulls are not going to give up easily, and would try to lift the Nifty towards the 6000 mark once again, before surrendering to the bears.

The current economic scenario holds no hopes for the bulls, at-least till the conclusion of national elections, and installation of a new Govt at Delhi. Let us hope elections are declared soon, so that the looming uncertainty is removed. Going by the current mood in the political circles, the Monsoon session of parliament will be a non-starter, it may ultimately trigger the announcement of mid-term polls either before or after Independence day. It should pave the way for a Nov-Dec. poll as indicated by me earlier. The markets may initially give a lukewarm response to the announcements, but would react positively later because the announcement of elections may prove to be a 'blessing in disguise' to kick-start a faltering economy. Till then let us keep our fingers crossed.

It is all about 'timing the market'

A large number of investors are sulking as their equity investment has yielded meager returns (in some cases negative returns) over the past over 5 years. The equity markets are yet to conquer the peaks established in 2008 (when the Sensex briefly crossed the 21000 mark and the Nifty touched the 6300 mark). Many investors who continue to hold their scrips since 2008, on the advise of market pundits that 'equity is a long term bet', have got returns which are even lower than the fixed deposit rates offered by the banks. Only those investors have made money who have churned their portfolios, keeping in view the high volatility in the markets.

For the common investor, it is a dilemma/ choice between the daily advise on the stock market given by the media (largely related to day trading) or the advise by fundamental analysts who focus on 'buy and hold' theory. Both these extreme theories are not for the common investor. It is very difficult to track the stocks on a day to day basis given the complexities of our job/ business commitments. Hence, day trading based on short term technical analysis is suited only for full time market participants. Similarly, the 'buy and hold' theory  works to the benefit of the investor when the markets are in a sustained bull run. Even investment through Mutual Funds gives reasonable returns in sustained bull markets only. 

It is in this context 'timing the market' plays an important role in getting a reasonable return from the equity market. Historically, Indian markets have delivered above 15% annualised return over the past 30 years. An equity investor should endeavour to achieve this return on his portfolio even in the medium term. This is only possible if we learn the concept of 'timing the market'. I am not advising the common investor to speculate in market and ruin his peace, but he should be able to understand the macro fundamentals of the market (like liquidity, currency fluctuations, economic factors) to ride the underlying market sentiments. Even the blue chip stocks are available at throwaway prices when the sentiment is down. Investors must learn the art of profit booking (as also loss booking if a wrong investment choice has been made). 

If we analyse the Nifty chart for the past one year from July 2012 to June 2013, Nifty has hit a low of 5032 and a high of 6230. There have been several occasions when it has moved swiftly from one extreme to another. This extreme movement of markets is measured as market volatility (VIX is an indicator of the volatility in Nifty, a VIX higher than 20 indicates higher risk in the markets). For a common investor it is advisable to book partial profits/ losses at regular intervals to sustain profitability of his portfolio. You can buy the same scrips at 20-30% discount when the markets correct. Currently, our markets have staged a smart rebound from 5570 level, on some positive announcements by the Govt. A rally to around 5900-5950 on the Nifty is anticipated, which would be a good level to book partial profits. We could witness at least a 10% correction from that level, which can be used for putting long term bets on the market.

"Market reaction to Fed statement idiotic" - I like it

This is what Samir Arora, Fund Manager, Helios Capital Management has to say, during the course of an interview to CNBC TV18. He was referring to analysts' comments on Fed Chairman's recent remarks about withdrawal of QE3. He further says: 
"I am not feeling bearish, in fact I am feeling a bit disgusted. We in the finance industry are more a bunch of overpaid, under worked people who are all really intellectually superior but have forgotten the original purpose of finance."  I can very well understand the anguish expressed by a fundamental analyst on the knee jerk reaction of the equity and bond markets world over. But that's the way markets behave, because they are driven on the back of liquidity in the system rather than market fundamentals most of the time.

Please visit my last post dated 31st May 2013, and you would know why I say this. In fact this reaction from the markets was overdue. And mind you this is only the beginning of a major correction in the markets, a rare scenario where equity, bond, and commodity markets have moved in the same direction - south wards. I had put the onus of our market movement on 3 major factors: global liquidity, India's economic woes and fluid political situation. Today's market reaction is mainly contributed to Fed statement on Global liquidity. The market is yet to take due cognizance of the other two factors.

In the days to come we could anticipate more negative reaction on India's economic woes stemming from a growing current account deficit (CAD) and a currency in free fall. FII figures in equity and bond markets have already turned negative. The political situation continues to be as grim as the flood situation in North India. I would like to re-iterate my opinion on the sudden announcement of mid-term elections pretty soon, especially after the self goal by BJP on NaMo's elevation, and its subsequent ramifications for polarization of many smaller parties under UPA. This may prompt the Govt. to go for early elections.

The markets will definitely react negatively to such developments, because they behave in an idiotic manner. But the ensuing fall in the markets would be a good opportunity to invest in equity for long term, as the risk-reward ratio would turn favourable once the markets dip below the 5500 level on Nifty and 18000 level on the Sensex. Investment in front line stocks from these sectors may prove rewarding: Oil & Gas (excluding OMCs), Pharma & Healthcare, Media & Entertainment & NBFC's (companies in race for banking licences). Await this golden opportunity to  unfold sooner than later.

Liquidity driven rally punctured: Economy hits a nadir

The writing on the wall was there for quite some time: But the bulls raged a fighting battle before succumbing to market realities. Both the front line indices suffered their worst losses in the past 12 months on 31st May 2013. The liquidity driven rally extended far beyond reasonable levels to 6230 on the Nifty. The jolt has come in the backdrop of dismal GDP numbers for India for fiscal 2012-13 and the noise by some Central banks on withdrawal of 'Easy money policy'. What to expect in the coming months for Indian equity markets?

Our markets would be driven by the following factors in the immediate future:

1. Global Liquidity: There are indications that global liquidity tightening would start soon as Central banks withdraw stimulus packages slowly. The Euro zone crisis will only deepen before a lasting solution is found for the revival of some member nations. Strengthening of US dollar would lead to a waning interest by FIIs in emerging markets like India.

2. India's Economic woes: India's GDP growth would continue to falter on the back of mismatch between supply and demand. The current account deficit (CAD) will continue to play a spoiler as exports stagnate despite Rupee hitting a low of 56.70/$ once again. A pick up in investment climate is still a far cry. Inflation scare continues to dodge the policy makers. Markets have tried to rally on the back of rate cut hopes, but no real rate cuts have happened despite a cut in Repo rate by RBI. This would make the bulls withdraw from the markets. The last quarter results of companies also paint a grim picture for the immediate future.

3. Fluid Political scenario: A lame-duck Govt. continues to survive amidst serious policy paralysis, as the opposition remains confused. The chances of any serious business being conducted in the monsoon session of parliament seem remote. If stars are to be believed there is a strong indication of announcement of mid-term polls before or after the monsoon session of parliament. If that happens we could witness Lok Sabha elections between 20th Nov-20th Dec. 2013, and the formation of a new Govt. By the end of December 2013.

All the above factors may lead to a serious erosion in equity indices over the next few months. The front line Nifty index could again go back to the levels of around 5500 soon. It could even test the level of 5000 in a short span if elections are announced in India or Ben Bernanke decides to withdraw the stimulus package.

'Contagion effect' could spell 'mayhem' for markets

Disclaimer: This write-up is not meant to scare investors, but enable them to understand ground realities and prepare them to take informed decisions on their investments.

 

Us equity indices are trading at all time highs and you thought that the global economy is in 'pink of health': you are mistaken. Bullion prices have smartly recovered from their recent lows and you thought genuine demand is back: you are sadly mistaken. Real estate prices have started firming up after stagnating for 2 quarters and all is 'hunky dory': you may be far away from reality. The month of May 2013 could lead to busting of many such myths and bring the world closer to reality. May may lead to 'mayhem' in the markets!

 

Let us understand the meaning of 'Contagion effect': According to Wikipedia Financial contagion refers to a scenario in which small shocks, which initially affect only a few financial institutions or a particular region of an economy, spread to the rest of financial sectors and other countries whose economies were previously healthy, in a manner similar to the transmission of a medical disease. Financial contagion happens at both the international level and the domestic level. To put it in simple words it can be explained as: 'When 'Uncle Sam' sneezes the 'Dragon' catches cold. Let us analyse the reasons that could pull all markets down in tandem.

 

Quantitative easing (QE): There have been three rounds of QE leading to pumping of liquidity into the markets to overcome the spectre of a recession. There was a consensus on the positive impact of QE1, whereas the opinion of economists was divided over QE2. But the consensus has been strong on the negative impact of QE3. Most economists believe that QE3 was responsible for excessive dose of liquidity in the markets which fuelled the prices of risk assets (Equity, bullion, real estate) to unsustainable levels. Now the markets are in a mood to correct these imbalances. The crash in Bullion prices is only the tip of the iceberg. Gold was traded at Rs.19500 per gram in 2011, so a correction to these levels should not come as a surprise to investors, after a temporary rebound. US equity markets have rallied to new highs despite serious questions on its growth prospects: a 10-15% slide cannot be ruled out. Real estate prices in Asia (more particularly India) are still quoting at unaffordable levels in most tier-I cities: a decent correction cannot be ruled out.

 

The trigger for a correction is most likely to come from Euro zone, which is on the brink of a major full-blown crisis. Indian markets would also have to contend with an uncertain political situation leading to the non-functioning of parliament/ dissolution of the Lok Sabha. Where would the money flow in such a scenario: The excess liquidity would definitely move into US treasuries leading to a strength in US dollar, which would weaken the commodity and equity markets. Gold & equity markets havs a potential to correct at least 20% from current levels: So don't be surprised to see Gold at Rs22000 per gram in Indian market, and front line Nifty at sub 5000 levels in this 'mayhem'. Realty markets could also stagnate for a few more quarters with tier-I cities bearing the brunt of the carnage.

 

The best investment strategy in such a scenario would be to sit on cash/ bank deposits, which can be profitably re-deployed once the downturn has played out. A real/ meaningful global recovery is still at least 2 quarters away. It may not be a bad idea to sell in the markets at current levels and go for a holiday in May 2013.

A 'Golden myth' shattered: Real Estate crash may follow!

The inevitable has happened: Gold & Silver prices have recorded their biggest single day crash in world markets today. Interestingly, media has got something new on its platter as compared to the boring debates on Narendra Modi vs Rahul Gandhi, none of whom is capable enough to become a worthy PM candidate of world's largest democracy.

 

The events of the past 2-3 days have shattered one of the most common myths cherished by many investors: "Gold prices can never fall''. Many such investors who put forth an argument in favour of investment in gold at ridiculously high prices was its 'safe haven' appeal and the limited supply, suddenly have developed cold feet and are quitting their gold investment in a hurry. The entire metal sector is witnessing a free fall due to escalation of the Euro zone crisis to alarming proportions. Indian economy is also in the grip of a massive slowdown, even as liquidity becomes tighter. The events of the past few days have started the exodus from physical assets which are held by investors till a panic situation is created.

 

Is this a precursor to the larger crash to follow? I am pointing towards a real estate market meltdown. If history is to be believed there are enough reasons for creation of a bleak scenario for the real estate crash in the near future. In a panic situation investors liquidate the most liquid assets first and illiquid assets are retained till the last. Real estate being the most illiquid asset, investors are still holding on to it, on the belief that they still have not lost money on their investment. This illogical belief is based on the artificial prices created by the builder lobby. The recent entrants to the real estate market will be the first to panic once they are faced with a liquidity crunch. The reasons for this to happen are very strong as the new real estate stock sold recently is almost entirely owned by speculators. End users have been left far behind in the race for owning their 'dream home'. The liquidity crunch coupled with an unstable political scenario is a perfect situation to create a crisis in the real estate market. In such a scenario first time home owners are advised to wait a while to get better bargains to suit their budget. It may not be a bad idea to strike a bargain to rent a property of your choice as rentals are on a southward journey. Commercial rental market is also showing signs of a massive slowdown. Those in need for owning a house may opt for 'ready to move in' properties rather than new projects which are being launched at unrealistic premiums during the festive season. Resale properties are available at 10-12% lower price point.

An economic recovery will not be sustainable without a real estate crash, as economic growth depends upon an orderly real estate market: both for individual home owners and corporate sector. Real estate must be available at reasonable prices to the end users. The asset class that will revive the risk appetite will be 'Equity'. Investors are advised to enter equity markets on declines as they drift lower in sympathy with commodity and real estate markets.

 

 

 

Extreme pessimism may push markets down: Investors advised caution

There is extreme pessimism in the markets, despite US equity indices making new highs. In my last post, four weeks back, I had anticipated the markets to correct to the level of around 5600 on the Nifty. The market has decisively breached the 5600 mark recently and is not showing any signs of a recovery soon. The underlying pessimism in the markets is a result of the following factors:

• India's economic recovery is still illusive. In fact fresh data is suggesting a further slowdown in growth momentum. Inflation is not coming down to reasonable levels and the Current account deficit (CAD) has blown to 6.7% of the GDP. Despite a falling rupee our exports continue to stagnate. There are serious supply side bottlenecks in core sector growth. Policy paralysis is making a heavy negative impact on the Infrastructure, Power & Mining sectors. New investors are shying away from investments in Indian projects. Even the FII flows are slowly turning negative.
• Political Uncertainty is likely to intensify in the days to come. This may lead to postponement of important economic decisions. The announcement of early General elections could dampen the market sentiment further.
• The news flow from Euro zone continues to caste its shadow on risky assets. The Cyprus issue could escalate  to a full blown crises for the Euro zone. There are other concerns too. North Korea continues to be 'Joker in the pack'. It has the capability to disturb the global equation, and may lead to military tensions with the west.

In the above scenario, the short term outlook for all risk assets (Equity, Bonds & Real estate) does not seem to be promising. We could soon see a panic situation in real estate markets as the liquidity is becoming tight. We could also  see a substantial fall in equity indices from the current levels. Equity markets could fall another 10% from the current levels and could stabilise around 5000-5200 on Nifty and 16500-17000 on the Sensex. A sudden declaration of war (by North Korea) or dissolution of Lok Sabha could have a knee jerk reaction on the equity indices which could take the Nifty to sub 5000 levels for a short while. If this happens it would be a really opportune time for investors to buy, as the indices would recover from their lows quickly. Investors are advised not to panic in the volatile environment and keep investing in front line  equity stocks on declines. Any short term bounce from the current levels towards 5750 on Nifty will be a good opportunity to book some profits & trim short term losses. An early election will be positive for the long term revival of the Bull market in India. If that happens we could see a sharp turnaround in equity markets in the 2nd half of FY 13-14.

Where to invest: Physical vs Financial assets

Physical assets are plant, machinery, land, building and bullion (gold /silver) e.t.c where as financial assets include cash, bank deposits, shares, bonds, marketable securities. Financial assets are used to purchase physical assets. In the past few years Indians have shown a marked preference towards holding physical assets over financial assets. It is believed that immediate past performance is a reason for marked preference for physical assets.  On the other hand, ownership of Indians, excluding promoters, in Indian companies (equities and mutual funds or MFs) has steadily declined over the last two decades. If we compare the returns: real estate investment has fetched an average annualised return of 27% since 2005. Gold has also given a 20% plus return over the past 3 years. Where as, broader equity markets have still not crossed the peak attained in January 2008, several midcap stocks have given huge negative returns during this period. No wonder, retail Indian investors have moved away from equity investment. On the other hand, blue chip Indian companies have been the preference of FII's during this period. Let us try to understand this paradox, in the back drop of evaluating the future prospects of equity investment vis-a-vis investment in physical assets.

 

Investment in financial assets has been, by and large, restricted to bank deposits because of the reach of the banks. On the equity side, despite the presence of several stock broking outfits and Mutual fund distributors, many of them facilitate trading rather than investing.  Investment in equities and MFs is perceived to be risky, where as gold and real estate get importance because of the social and cultural needs and aspirations.  Equities have not caught the fancy of investors even though long-term capital gains are tax-exempt. Lack of sophistication among Indian investors has allowed higher investment in gold (despite high impact cost of buying gold in jewellery form, quality issue, limited liquidity) and real estate (despite issues related to pricing, delivery, high impact cost of transaction and liquidity). Non performance of Indian equity market in the past 5 years is also driving investor preference towards gold and real estate.

 

Considering the above facts where should the investor put money in 2013?. Let us analyse the prospects of these asset classes over the next 5-7 years:

• Real estate: Indian real estate market has thrived on the lack of transparency in transactions coupled with speculative investment due to high global liquidity. Investment by end users is steadily declining due to exorbitant prices. Builders are saddled with huge unsold inventory, and over 50% properties sold have been lying vacant in premium markets like NCR. This is a bubble in the making. The prices have started cooling off, and the average returns expected in large pockets will reduce to single digit in the days to come. The speculators will be forced to distressed sales as global liquidity declines. We cannot expect double digit returns (net of the holding cost) from real estate in the years to come.
• Gold: Although gold has given phenomenal returns over the past decade, the gold cycle seems to be petering out. International prices of gold are stagnating in the $1500-1600/ ounce range, but prices in India have given a 20% return in past 2 years, mainly because of Rupee depreciation. As the investment cycle turns positive from 2nd half of 2013, Indian rupee would strengthen, pushing down gold prices in India. Gold might give a negative return during the year, in such a scenario. Tough measures taken by the Govt. to discourage gold imports might dampen the sentiment further in India.
• Bank deposits: The lure for safe investment will continue to provide a reasonable growth in bank deposits despite a negative inflation adjusted return. A fall in inflation rate will be a huge positive for growth in bank deposits.
• Equity: Despite giving a 25% return in 2012, equity investment has still not caught the fancy of Indian Investor. He has been consistently selling his stake in Indian companies to FII's. Equity investment is largely influenced by the earnings cycle which is likely to turn positive from 2nd half of 2013. The major reasons for this expectation stem from a falling inflation and falling interest rate regime. New investments would spur economic growth after next general election. We could see a mid term poll during 2013. My expectation from equity markets for next couple of years is a 18-20% annualised return, and we could see equity markets/ indices doubling from the current levels in next 4-5 years. However, in the extreme short term I expect the equity markets to settle lower at around 5600 on Nifty, or little lower. A sustained up move will unfold in the 2nd half of FY13-14, after prolonged consolidation.

To sum up, I foresee a decisive shift in favour of Financial assets over Physical assets during the next 12-18 months, as the returns from Real estate and Gold languish and equity markets start to out-perform.

 
 

 

 

 

Budget Blues: Golden opportunity to invest in equity

Budget session has brought a welcome correction in the equity markets. The correction that commenced with the presentation of Railway budget got accentuated with the presentation of General budget. However, the budget of the Union govt. cannot be blamed for the debacle. As mentioned in my last post the markets had run up ahead of fundamentals and were ripe for a decent correction. Unecessary hype was created in the run-up to the budget, disregarding the fact that the FM did not have enough leverage to offer any fresh sops to the stock market. The markets have reacted with a negative view on the budget, although the budget does not contain any major negatives for the markets. The lower GDP figures for Q3 have added to the markets woes.

The speculative positions in the market have been cut, in the backdrop of the unrealistic expectations not having been met by the FM. As indicated by me earlier, markets have corrected to reasonable levels and would consolidate around 5600 levels on the Nifty (18500 on the Sensex). According to me these levels are decent levels to accumulate good stocks with a one year perspective and with reasonable expectations of a 15% return by next budget. As speculative positions get cut, the ownership will slowly get transferred into safer hands, which augers well for the future of equity markets.

We must remember that the current budget has been presented in trying circumstances, and the FM must be congratulated for not dancing to the gallery in the election year. The most important aspect of the budget is the resolve towards imposing a pragmatic approach towards fiscal consolidation. If the FM can curb the Fiscal deficit, everything else will fall in place. This augers well for the future of equity markets. Investors are advised to put money into equities now, and wait patiently for markets to consolidate around the current levels for a while. The next major cue for the markets will be the FY 12-13 results of India Inc., which will start flowing in from the middle of April 2013.

Equity Markets poised for a correction

Indian equities have seen a spectacular run in the first month of 2013, thanks to the continued support from Foreign investors. Although the long term trend for our markets is definitely up, the market signals are pointing towards a 8-10% decline from the current levels in the short term. What are the factors that could induce the anticipated decline?

• RBI has obliged with a 25 bips Repo rate cut coupled with a 25 bips CRR cut as per market expectation. It has also indicated that there is little scope for further cuts in the immediate future.
• The major indices have been maintained at the current levels with the sector churning by large players. With the result season coming to an end there is little scope for the churning to continue.
• The advance-decline ratio has been under pressure, with mid caps showing vulnerability to hold on to the current levels. The fragile nature of mid cap momentum stocks is likely to give way to a decent decline once the front line stocks exhaust their momentum.
• The Indian economy continues to be plagued with severe supply side bottlenecks. The capex cycle is yet to pick up despite right noises by the Govt. Most of the recent policy initiatives have remained on paper only.
• The dis-investment cycle of Govt. in coming days will put pressure on the secondary market, as much of the liquidity will be sucked into the large dis-investment planned by the Govt.
• The market players will now await indications from the General Budget to be presented on 28th February. The markets would be on their tenterhooks before this major event, as the chances of a hike in tax rates is very much inevitable.

All the above factors indicate sluggishness in the markets. Investors are advised to book some profits and wait for the levels of 5600-5800 on Nifty (18800-19200 on Sensex) to re-enter again for long term.