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.