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.