'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.

All is not well: Investors need to protect capital

The global news flow is pointing towards the fact that 'All is not well' for risk assets and equity markets. Despite Eurozone giving indications of stitching a package to bail out Greece and other countries, or ministers of Union Govt. in India calling for a temporary truce, the global markets are not yet out of the woods. We are inching closer towards a 2008 like situation, when all markets nosedived in tandem. The only exception till now has been the real estate market which is still holding fort despite heavy odds. Equity markets world over have shown strong bearish overtones. Last week, commodity markets, including gold and silver, have shown signs of capitulation. Real estate market is the last to show a decline, when liquidity is squeezed out. The announcement of a massive debt raising programme of over Rs.50000 crores by Govt. of India is likely to give a huge negative on the liquidity front. With RBI unrelenting on the hawkish stand on rate hikes the things do not seem rosy at all for the huge debt ridden real estate sector. It is only a matter of time when the downturn will gather momentum.

The high level of Nifty VIX (volatility index) is clearly indicating nervousness amongst market players. What should retail investor do at the current juncture? As indicators are pointing towards a 'lower top and lower bottom' formation in the Indian equity markets, investors are advised to book profits on every rise. Fresh investments should be put on hold till markets firmly make a bottom, anywhere in the range of 4500-4700 on the Nifty. That would be the time to make fresh purchases in equity markets. On the other hand, it is also not advisable to shift money to commodity markets, as global downturn is likely to take a heavy toll on the commodity prices. Precious metals like Gold, Silver, Palladium may show a temporary bounce due to the ensuing festive season, but they are ripe for a steep fall of 15-20% in the medium term.

The age old adage 'Cash is King' seems to be the best option at this juncture. Investors are advised to hold enough cash (and bank deposits) in their portfolio, and wait for better opportunities to emerge for investment in risk assets like equities and commodities. For India, things will start to improve in the next 3-4 months, once RBI signals an end to the high interest rate regime and commodities, including crude oil, slip to reasonable levels. The fortunes of Indian economy will hinge largely on the developments on the political front, where the situation continues to remain uneasy.

Global Economic Slowdown: Equity Markets in turmoil

Global economies led by Euro zone are heading towards a major slowdown/ recession. The economic factors emanating in India are also indicating a significant downturn in India's growth prospects in the current fiscal. The global crises in the long run needs to be tackled through fiscal measures such as tax cuts and creation of employment opportunities. But the G-7 countries have tried to address the issue by printing currency, which is fuelling inflation in the Asian economies. Another round of quantitative easing (QE) may be a stop gap arrangement to address the issue, but it may have long term negative impact on a sustained economic recovery. Default by several Euro zone countries like Greece, Spain, Italy is looming large at the current juncture.

In India, inflation continues to be closer to the double digit levels, forcing the Central Bank to continue with the unabated rate hikes. This does not auger well for India Inc. as the profitability of companies will be under severe stress. Another round of rate hike is definitely on cards on the 16th of this month. The dismal IIP data released today reflects the slowest growth in factory output in the past 24 months. Indian equity markets are trading at 14-15 times forward earnings at current levels, which is expensive on a comparative basis with the other Asian peers. The premium that our markets command is bound to get corrected with an impending slowdown in the Indian economy, unless some drastic policy measures are initiated by the Govt.

Our equity markets are likely to remain highly volatile in the near term. The major indices are likely to retest their recent lows (4720 on Nifty, 15700 on the Sensex).  Investors are advised to keep a watch on these levels, and if the markets decide to consolidate around these levels it may prove to be a decent investment opportunity for the long run. The focus should be on investing into those companies that have a minimum debt on their books, because they are the ones that will survive a major earnings downgrade. Corporate earnings for the September quarter, which would start flowing in a months time would confirm this view. Meanwhile, the markets would continue to be governed by global economic news.

'Off Season Sale' on Dalal Street: Pick your Bargains

Newspapers are abuzz with announcement of Bargain Sales. Hoardings around the city greet you with amazing offers. It appears that the entire nation has been gripped with the 'Sale Mania'. Very soon Dalal Street will also join the 'Great Indian Equity Market Sale'. The dark clouds on the horizon are a precursor to a Tsunami hitting the Stock market soon: Another interest rate hike in India is imminent soon, The Govt. is heading for a final showdown with the opposition. In other parts of the world the financial crisis is likely to take a heavy toll.  Historically too, August-September have been lean periods for the stock markets world over. All these factors are a pointer towards the 'Great  Indian Equity Market Sale' opening up soon. Mind you once that happens everybody would be telling the investors to quit, as if the world is going to end soon. Smart investors are advised to ignore the doomsayers advise and indulge in 'Bargain Hunting' at that time.

I am expecting our markets to stabilise and consolidate in the range 4750-4950 on the Nifty, corresponding to 15800-16400 on the Sensex. Smart investors are advised to pick their bargains during this period, any fall below these levels should be considered as a bonus. We should approach the markets just like we approach a Sale. First, we must convince ourselves about the genuineness of the sale price, scrips that have been artificially boosted before declining should be avoided. Secondly, investors should focus on 'Quality', some quality stocks are also available at reduced prices during the Sale. Thirdly, stocks should not  be bought at one go, one must keep on adding small lots on every decline, remember the prices are continuously slashed towards the end of the clearance sale. The trapped operators in stock markets offer stocks in 'distress sale' due to liquidity crunch and margin calls. That is the time to make a killing.

From the fundamental perspective, the risk-reward ratio would turn extremely attractive at the above indicated levels, when our markets would be available at 13-14 times forward earnings, after factoring in the slowdown in the earning potential of the companies. Entry at these levels would ensure that the investors earn a decent return of 15-20% CAGR and above for the next 2 years. However, the chances of the markets going down further up to the levels of 4300-4500 on the Nifty are a distinct possibility in case of a bigger global turmoil. But investors should bear in mind that it is virtually impossible to catch the markets close to the bottom, because the recovery from the panic bottoms are equally fast. Please prepare yourself for the opportunities, as indicated above.