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.

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.