Equity: The best asset class in 2012

It may seem surprising for many, but the matter of fact remains that equity has proven to be the best performing asset class for the Indian investor in calender year 2012 with a 25% return. Indian equity markets have been amongst the top 3 best performing markets of the world in 2012. Nifty which was languishing around 4700 levels in January 2012 will close the year around the 6000 mark. Other asset classes that have been outperforming equity in the past 3 years have given a much subdued return during 2012. Gold was able to give around 10% return but much of that is attributable to the sharp rupee depreciation. Real estate returns have also languished in the single digit range with Delhi NCR recording just 7% growth and Mumbai recording  a 4% return.

 

But most retail investors still remain a confused lot and most of them may not have made money in the equity market. With the wild swings in the equity market, only the nimble footed investors who kept on churning their portfolio have been able to stay afloat. But the good news is that the worst is almost certainly over for equity investment, and the next bull run will gain firm foothold once the RBI starts reducing the interest rates. Investors must take the plunge into equity on every decline for a decent return in 2013 as well. The return on Gold is expected to be subdued in India, as the Indian rupee is expected to gain some lost ground against the dollar after March 2013. Real estate market will continue to give lack lustre returns for 2013, other than some surprises in select pockets of NCR region.

 

When to enter the equity market in order to make reasonable returns? At the current levels of around 19500 on the sensex and 5900 on Nifty the markets seem fully priced given the current earnings estimates. A fall of 10% from the current levels should be a good opportunity to enter the equity market. The fall may be triggered by negative news on the US 'Fiscal cliff' issue or the escalation of Euro zone crises. Indian economy has seen its worst performance already and is ripe for a rebound in Fiscal 2013-14. Easing inflation, Low interest rates, a stronger Rupee and stable Commodity prices in 2013 will help revive the fortunes of the Indian economy. We may see an upgrade of our GDP growth prospects in the 2nd half of 2013. Stock market is poised to take advantage of this scenario, and give reasonable returns during 2013 as well.



Equity Investment: Poised for explosive returns

Equity investors have had a raw deal in the past almost five years. The broader indices which recorded new highs of 21000 (on Sensex) and 6300 (on Nifty) in January 2008, are trading way below those levels today. It has been a volatile market ever since, where the nimble footed traders only have made profits. But equity markets are now showing signs of bottoming out and are likely to give stellar returns in Samvat 2069 and 2070.

 

Equity markets move in cycles and the tide seems to be turning in their favour now. Let us understand the factors that will trigger the revival in equity markets:

• Global Economic recovery: The turbulent times in equity markets were a direct consequence of the global economic turmoil in the past 3-4 years. US economy has shown definite signs of revival, however, concerns about the 'fiscal cliff'' remain. The Obama administration is likely to find a solution to this issue in the next six months. Euro zone is also likely to return to normalcy, despite problems of a few member nations. India and China shall be back to higher growth trajectory as inflation issues get settled.
• Interest Rate Cycle: The Interest rate cycle has already peaked in India. The Govt. of India is taking steps to control the fiscal deficit. This will result in taming inflation by the last quarter of fiscal 2012-13, and the consequent strengthening of the Indian Rupee. We should see the Indian Rupee moving towards the Rs.50 mark against the US Dollar by March 2013. This will trigger FII's returning to Indian markets in droves. Once RBI gives the signal for cutting interest rates, markets will be compelled to re-rate the growth potential of companies.
• Political Climate in India: The political climate has been vitiated with the focus on scams. The negative political cycle has almost played out and we could see the Govt. returning to the path of sustained economic growth. We could see early elections and the positioning of a progressive Govt. at the centre by the end of 2013. This would pave the way for a smart and consistent recovery in the Indian stock market.

Given the above scenario, I would be inclined to give a thumbs up to equity investment at this juncture.  Any correction in the equity markets from hereon, should be taken as a golden opportunity to invest in equity market. The markets are not likely to fall below 17000 on Sensex (5200 on Nifty). As per my conservative estimate I would put the level of Sensex at 25000-26000 (Nifty at 7500-8000) by Diwali 2014. As it always happens, some new sectors would lead the surge of the equity indices in the new bull run. I am particularly bullish on Media & Entertainment, Hotels & Travel, Export oriented sectors (Textiles & Gems/ Jewellery), Infrastructure (Roads, Ports & Logistic businesses), Power sector to lead the next rally. Investors are advised to make their portfolio with companies from these sectors. Wish you 'Happy equity investing'.

 
 

 
 

 

Investment ideas for samvat 2069

Diwali the festival of lights is also an auspicious occasion to review one's investment portfolio. Samvat 2069, marking India's official new year (The Vikrami era) has commenced on March 23, 2012. But for the business and the broker community new Samvat commences on Diwali day, when they introduce new books of account after performing 'Lakshmi Puja', the worship of the goddess of wealth. So this is an ideal time to review the wealth earned on an individual portfolio. Let us review the potential of each major asset class during Samvat 2069:

 

Fixed income Instruments: The interest rate cycle has almost peaked out and we could see a reduction of at least 1-1.5% in the benchmark interest rates till next Diwali. Bank deposits have shown a decent growth in the last year, and investors looking to invest in safe havens are advised to book long term deposits of 3-5 years before interest rates start falling. Bond market which has given a stellar performance in Samvat 2068, may remain subdued as risk appetite returns.

 

Bullion & Precious metals: Gold has lived up to the ancient proverb 'All that glitters is gold' having given around 15% return last year. Silver has also added to its lustre. But most of the gains in Samvat 2068 are attributed to the depreciation of Rupee. The Rupee has depreciated by over 12% to a level of Rs.55/dollar after briefly falling to the levels of 57/58 in July-August 2012. The fear generated out of the "Fiscal cliff' in US and the consistent support of Obama for Ben Bernanki, the global liquidity position shall remain comfortable, pushing Gold/ silver prices to new highs in Samvat 2069. Gold prices currently hovering at $1720/ounce are likely to appreciate towards $2100 mark in a years time, marking a gain of 20%. But the impact in India will be muted as Rupee is also likely to strengthen by at least 10% once the Indian govt. is able to fix its fiscal/ trade deficit. We could see rupee/ dollar parity of 50 by March-April 2013.

Real Estate: Investment in property has yielded super normal returns in the past 3-4 years. But the growth has slowed down in the later half of samvat 2068. The realty market is currently overheated due to excessive speculation. Dearth of genuine buyers in the market does not auger well for the orderly growth of this market. Social activism is exposing the nexus between businessmen and politicians in garnering real estate at rock bottom prices and then jacking up the prices artificially to make super normal profits. There has been a tendency amongst builders to offer more and more luxury projects without adequate demand to support the high prices. Real estate market, other than the affordable housing, is headed for a massive slowdown in Samvat 2069.

Equity Market: Equity market has given a return of around 9% in Samvat 2068. However, from the view point of the small investor markets have hardly moved between January 2008 to Diwali 2012. The broader indices have yet to top the highs (21000 on sensex and 6300 on Nifty) made during January 2008. This is precisely the reasons small investors have shun the market. The markets have gone up in the recent past mainly on the back of FII investments. FII's continue to be bullish on the Indian equity market. small investors are advised to follow the FII's as the bad times in the markets are over. The next major bull run will be triggered by the announcements of interest rate cuts by RBI in the last quarter of current fiscal. Markets could test the earlier top of 6300 on the Nifty during Samvat 2069. The volatility will, however, continue and the markets may move in a broad range of 5200-6400 on Nifty till next Diwali. Investors are advised to enter near the lower end of this range for a 20% return within a year. I shall discuss in detail the prospects of equity markets in my next post.

I wish all investors a very fruitful Samvat 2069.

US Presidential Election 2012: It's implications for India

Hopes are running high as US votes to elect its 45th President. Mitt Romney of the Republican Party would be the 45th President of US if he wins the November 6th electoral battle. Barack Obama seeking 2nd term as a Democratic party candidate is on a shaky wicket on the eve of the elections, despite a strong last ditch effort by former President Bill Clinton in his favour. Obama has also tried his level best to turn the tide in his favour by the sympathetic handling of the situation arising out of 'hurricane Sandy'.

What are the implications of this electoral battle for India? Barack Obama inherited a weak US economy from his predecessor George Bush, but has not been able to bring back the US economy to its past glory. Unemployment and jobless claims have risen to new highs under Obama administration, even as the economy grows at a paltry 2.3% p.a. Obama the Lawyer-politician faces a stiff test from Romney the Businessman-politician. 1947 born Romney is much older than 1961 born Obama. Will the US public choose a more experienced man over the youthful Obama?

Obama's policy towards India has been a mixed bag. In rhetoric he has defended India against its rivals China and Pakistan, but has done precious little to re-enforce his stand. His policy of appeasement towards Pakistan has left India high and dry. He has often supported China at the cost of long term US interests, for short term gains for US treasury. Mitt Romney is far more outspoken about his views on China, it remains to be seen how he behaves towards China if elected. Obama who has had a restrictive Visa regime for Indians, has been an obstacle in India's entry into certain areas in the US economy. Mitt Romney has taken a liberal view on Visa for Indian nationals. 

Although it is going to be a photo finish I shall put my money on Romney, because he could be a better option from India's perspective. A victory for Romney could provide the US economy a much needed booster with an immediate uptick in the stock indices. Indian markets would also greet a victory for Romney. The commodity markets which have been depressed for sometime could see a strong upsurge. We could see Gold and Silver prices attain new highs by year end. However, the price impact in India would be marginal as we could see the Rupee gaining ground against the US Dollar. I would expect the Indian Rupee to get stronger towards the Rs.50 mark to a dollar in the next 2 months.

Realty Bytes: Are we headed for a crash?

The Indian property market has been booming since March 2005, when the UPA government decided to liberalize foreign direct investment norms in real estate and introduced the SEZ Act 2005, and allowed private equity funds into real estate. While the sub prime crises engulfed the US in 2007, leading to a crash in US property prices and a contagion affect in Europe, Indian property prices stood firm.  Real estate in India has bucked the trend of non-performing asset classes. Property prices have outperformed equities, currency and bonds by a wide margin in the past 5 years. India ranked second out of 50 countries in annual growth of residential prices, in Knight Frank’s latest global housing price index, the average property prices rising by over 22%. The average price of the Indian real estate pie has almost trebled in the past decade. A valid question being asked by almost everyone looking for property in Mumbai, Delhi or any of the other city where real estate prices have spun out of control, is about real estate bubbles in the Indian property market. A real estate bubble happens when the cost of homes climbs unrealistically fast, overlooking the affordability factor.

 

Is the euphoria in real estate prices sustainable in the long term? The most convenient argument in favour of high real estate prices is that land being a scarce resource its demand will always outstrip supply. But some important facts discussed below deserve some merit:

• Huge inflow of black money in the Indian real estate sector has avoided a sub prime like crisis, as most lenders finance only the book value of the property which does not take into account the black money. This acts as a buffer for the lender in case of default, and also acts as a deterrent against wilful default as the borrower's actual stake in the property is fairly high.
• In a slowing economy income levels have not kept pace with the rise in property prices leading to a reduction in end user demand. The increasing presence of speculators is keeping the prices artificially high. About 65% of flats in Delhi and 35% in Mumbai are in possession of speculators according to Jones Lang La Salle.
• Rental yields at 2-3 percent compare unfavourably with fixed deposit rates of 8-9 percent. With inflation at a high 7-8%, holding on to property will become increasingly difficult given the high interest rates.
• Unsold inventories in major metros like Mumbai and Delhi NCR are giving ample signals for an impending crash like situation. A report by real estate consultant Knight Frank has revealed that Mumbai has more than 80,000 flats lying unsold. This is in addition to another 50 to 100 thousand flats which are vacant, but not available for sale. Another study reveals that over 61% of the allotted flats in Gurgaon are lying vacant.
• Builder cartels are playing games to keep the prices artificially high. A few units are released under a pre-launch plan and new escalated prices are announced at the time of official release to create liquidity for initial investors. Recent liquidity released by Central banks has been responsible for success of the builder-speculator game plan.

In the days to come the liquidity position will become tight as European crisis comes back to occupy the centre stage again. At that stage the supply and demand mismatch shall force distress sales from builders straddled with unsold inventory. As the spiral of downward trend in property prices extends, distress sales from speculators will increase the supply leading to a further fall in prices. In the given situation, property prices are vulnerable to a crash in the prime markets of Mumbai and Delhi-NCR. There is a possibility of property prices correcting up to 15-20% in these markets. Tier 2 & 3 cities may avoid a major downfall as there is still genuine buying demand in these cities.

 

 

 

Quantitative Easing (QE3): Monster Unleashed

An ailing patient already in ICU has been put on ventilator, and the world is celebrating! The ailing patient is the Euro and it is now threatening to spread the contagion affect to other economies of the world. The announcement of QE3 by US Fed chairman Ben Bernanki has sent the world equity markets soaring and Gold-Silver scaling new highs in India. Other commodities including Crude Oil are also in a celebration mood. Taking a cue from Bernanki, Manmohan Singh Govt. has also announced a few reform oriented measures terming them as a 'bold initiative'. No doubt, the markets are celebrating, but is this euphoria justified?

 

Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. Following the stimulus measures announced by Draghi of ECB, it is the third time the Fed has gone to extreme measures to inflate the money supply, and thereby increase economic activity. The Fed announced its plans to buy up to $40 billion worth of mortgage bonds each month from now until the end of the year.

 

Quantitative easing may cause higher inflation than desired if the amount of easing required is overestimated, and too much money is created. If QE3 misfires US could slip into a zero growth territory as Japan suffered in the past decade due to deflation. QE3 has the potential to disturb the apple cart of economies like India who import 70% of their oil requirement. Oil prices and other commodity prices are likely to zoom as the excess money printed by central banks finds its way into the commodity markets. One asset class that is sure get benefited will be the precious metals like Gold and Silver which may touch their lifetime highs by the end of the year, as US $ comes under pressure. The Indian Rupee should show some strength but its upward movement against the dollar would be capped by the huge fiscal deficit which is likely to be around 6% of GDP.

 

The stock markets which are showing strength are ignoring the negative impact of QE3 as discussed above. Investors should take this opportunity to book some profit around 5700-5800 on Nifty, as the markets would start correcting soon as the perception of traders undergoes a change once they do the reality check. The reform measures announced by the Govt. will also face much criticism from the opposition and some of them may have to be rolled back or put on hold. The euphoria in the equity markets does not stand merit given the fragile nature of Euro zone, which will have a negative impact on Indian economy in the short term. Equity investors need to adopt a cautious approach, albeit investment in gold would be a smart choice at this juncture.

CAG Bombshell: Can the markets survive the shock?

Govt. auditor CAG has lobbed not one but three bombshells by submitting reports related to Coal block allocation, allocation of UMPP projects and Delhi airport development, putting the combined notional loss at over Rs.3,00,000 crore. The negative reaction of the press and the opposition to the reports has pushed the economy in the grip of a major crisis. The extent of damage these reports can inflict on the health of the economy is unprecedented. The basis of fixing the notional loss itself is fraught with grave consequences for the future of Indian economy. The voices of cancellation of the entire coal blocks allocated by UPA II can send shock waves for the investment climate in the country. It is like pushing the country back to the dark socialist era where private enterprise was treated as a curse for the economy. The GDP growth rate which has already slipped to 5.5% for the first quarter of FY 12-13 can slip below 5% if the current logjam is not resolved with a sense of urgency. The captains of Indian industry led by Deepak Parikh have expressed anguish at the current state of affairs.

 

I have a feeling that CAG and the main opposition party BJP will have to share the blame for pushing the country towards anarchy. History will never forgive them for the blunders committed by them. CAG on its part has presented an unrealistic view of the situation by sensationalising the figures quoted by them. Development of the country has a cost but the cost has to be calculated realistically. How can we auction a scarce commodity like coal which is the main input for producing power for a power deficient country like India. Can anyone imagine the price of a unit of electric power if the coal blocks are auctioned as per the figures put out by CAG. Will the people of this country be able to meet the increased price of power? CAG has also failed to appreciate the difference between an administrative decision of coal block allocation and the criminal nexus between govt. officials/ ministers and the private sector mining companies. The law of land is strong enough to punish such criminal nexus. Media should also focus only on such criminal acts and refrain from painting the entire picture as ugly. CAG has also woven a web of controversy around one of the best examples of PPP- Delhi International airport (DIAL). Does CAG want to say that we Indians do not deserve any world class projects!

 

The role of the principal opposition party BJP is even more circumspect. It has failed to uphold the basic tenets of parliamentary democracy leaving the parliament paralysed for several days and weeks. The cost of running the parliament for one day comes to Rs.2 crores. Can BJP tell this country who is going to bear this cost. In the bargain BJP is fast losing its credibility in public and may loose the status of the principle opposition party in the next election. BJP is primarily responsible for making mockery of the system. Its top leader L.K. Advani has already conceded defeat by tweeting that Third front will form the next Govt. at the centre, and both Congress and BJP will bite the dust in the next elections. I am afraid the time is running out for both the Govt. and the opposition to rescue the country from the mess that the political class has created. People of the country are losing their patience and the consumer confidence is touching new lows. Our politicians must rise above partisan politics to salvage the dwindling image of the country, before it is too late.

 

Even in such circumstances our equity and commodity markets have been holding on steadfastly. Gold and Silver have touched new highs due to easy liquidity being pumped by the western economies. The markets will definitely react to the political crisis in India. But the chances of a major fall is ruled out. The new range for our equity market would be between 5100-5800 on the Nifty till the end of the year. Any dip in equity prices should be considered as an opportunity to invest for long term. Luckily for our economy the monsoon has revived smartly in August and the rural demand is robust. Fall in consumer prices will be the major trigger for easing of interest rates by October end. The signals from nature and world markets are extremely positive, provided CAG and BJP can do some soul searching to help revive the fortunes of our economy.