Legacy of UPA 2: From a post election rally to a pre election rally

It is ironical that the UPA 2 Govt. at the centre came to power in 2009 to kindle a strong post election rally on Indian stock market, and it is bowing out in 2014 with a record breaking pre-election rally. The difference, however, is that in 2009 markets greeted the formation of a strong UPA Govt., this time around they are celebrating the ouster of a weak UPA Govt.: a stark change in the perception of the market pundits in a span of 5 years.

The markets have closed FY 2013-14 on a high with Nifty scaling 6700 and Sensex comfortably placed above 22000. There is some more steam left in the markets as the election euphoria gains momentum. But there is a word of caution for investors who wish to enter the markets at the current levels. There is a consensus among a wide range of analysts about Nifty scaling 6900-7000 levels by March 2015 (Sensex levels of 23000-23500), on the back of a stable BJP led Govt. at the Centre and a good monsoon to bolster the chances of an economic revival. Outgoing UPA 2 has done its bit by reducing the CAD and stabilising the Indian currency with support from RBI.

Investors may be lucky if they see the levels of Nifty at 6900-7000 in April 2014 itself in the run-up to the General elections. In such a scenario it would be prudent to book substantial profits rather than wait for March 2015. The post election movement of our markets would be dependent on far too many variables: Strong Rupee, Inflation management, Progress of monsoon and also International developments. Rather than hoping for a favourable result on all these parameters it would be a better bargain to book profits as the opportunity arrives due to pre-election euphoria. There are more than 75% chances of a reasonable correction after elections, even if a BJP led Govt. is installed at the centre. The markets have already factored in the best case scenario. Take your bet on one of the most exciting elections of our times.

2014 promises to be a year of 'Equity Investment'

Indian investors have got a raw deal from equity markets for the past 5 years, except for those who had their portfolios inclined towards Pharma & Technology sectors. These 2 sectors have out- performed on the back of steep erosion in the value of Indian currency. However, broader market has given meagre returns as compared to other asset classes like Bullion and Real estate. Thankfully, this situation is on the verge of a change, and equity markets are poised to out-perform other asset classes during 2014.

 

Due to slowdown in economic growth coupled with a spate of stimulus packages, money has moved from productive to un-productive assets. Industrialists have been facing a resource crunch because surplus funds by savers have been diverted towards accumulation of Bullion and Real estate. Indian households saving rate has been steadily declining. Gross domestic savings as a proportion to GDP fell from a high of 36.8 per cent in FY08 to 30.8 per cent in FY13, according to the Reserve Bank of India. The apex bank has blamed the sharp fall in domestic savings on the steep decline in financial savings of households which dropped from 11.6 per cent of GDP in FY08 to a poor 8 per cent in FY13. This situation is likely to reverse from 2014.

 

As per analyst reports Gold prices have declined by 50% from peak levels and are currently hovering around $1200/ ounce levels, with an expectation that they would remain soft during the rest of 2014. Prices of gold in India have been artificially inflated due to a high 10% custom duty imposed on Gold imports. Real estate prices have also peaked and would at best consolidate around the current levels for the rest of 2014. Certain real estate markets may even seek lower levels due to excess supply. Therefore, the chances of making money by investing in Bullion and Real estate during 2014 seem bleak, which is likely to discourage investors and speculators from putting more money into these asset classes.

 

The world economic cycle is poised to turn around in the second half of 2014, leading to revival of industrial activity. Indian economy would have to wait for the turn around till after the General elections due in April-May 2014. Our equity markets would remain volatile as the election process unfolds. There is a fair chance that you may get a 10% annual return from equity markets even from current levels, but you could get this kind of return from bank deposits without taking risk. So one must aim to get a higher return from equity investment, which you can hope to get if you invest on declines. Investors are advised to enter the markets on declines (5-10% decline from the current levels could be a good investment opportunity), for a decent 20% upside on a balanced equity portfolio.

Why are markets celebrating? Beware of the pitfalls

Stock markets continue to exhibit exuberance despite disappointing signals on the economic and political front. It is argued that FIIs continue to pump money in Indian bourses and will continue to drive the markets upwards. But, Indian economy continues to be in the grip of a severe crises of Governance. Unfortunately, among the contenders of power we have outfits that have contributed to the mis-governance in their role as opposition. Among the leaders in contention to lead the next Govt. we had an 'amateur' and an 'arrogant, and recently we have added an 'anarchist' to the list, adding to the woes of the economy. Whosoever amongst these gets elected to the throne is likely to face stiff resistance from the other two leading to a prolonged period of lack of governance. This is likely to delay the process of economic recovery which the markets are expecting immediately after the General elections.

 

RBI is set to announce its 3rd quarter monetary policy on Tuesday, amidst slowing economic growth and stubborn inflation rate. Those expecting a fall in interest rates may be in for disappointment as RBI at best may hold the existing rates. GDP continues to flounder under the 5% mark continuously (GDP for Sept. quarter was recorded at 4.8%, mainly supported by good Agri. growth, while IIP continues to trade in negative territory), although there has been a marginal decline in inflation rate due to a fall in vegetable prices. FIIs may be looking at the economic data closely, and would reverse their stance on Indian markets at any time, leaving the small investors in a quandary.

 

Small investors are advised to exercise extreme caution, and avoid making fresh entry in the markets at these levels. Markets may correct significantly in the run up to the elections as volatility in the markets shoots up. Keep an eye on the 'Nifty Vix' as it may once again attempt to go past levels of 20 in the coming days. It may not be a bad idea to book substantial profits in the stocks from IT and Pharma (although long term growth prospects remain intact) and other sectors that have run up sharply in the past few sessions. Investors may wait for a 10-12% correction from the current levels to initiate fresh investment (These levels could be around 5500-5700 on the Nifty). 

Markets sign off on a positive note: Crystal gazing for 2014

Indian stock markets attained new highs towards the close of calendar year 2013 after a gap of almost 6 years, and have closed the year on a positive note. The Sensex gave a yearly return of 9% and Nifty 7%, but the Midcap and Small-cap indices burnt a hole in the pockets of investors with double digit negative returns. Gold & Silver also turned bearish after attaining new heights during the year. But the coming year promises to be a year of extreme volatility, as India enters in the election year.

The markets would continue to be driven by easy liquidity for the first few weeks of the new year 2014, amidst negative news on the economic front. FIIs would allocate new funds to the emerging markets to sustain the momentum. Markets have pinned their hopes on a strong Govt. led by BJP at the centre. However, the AAP factor cannot be ignored any longer. Any setback to the BJP's electoral fortunes would lead to profit booking in the markets. Although the broader consensus has emerged that it is a 'buy on dips' market during 2014, the market may fluctuate within a wide range of 5500-7000 on Nifty, and 19000-24000 on the Sensex.

Other asset classes like Bonds, Real estate & Bullion are not likely to fare better during 2014, so Equity as an asset class would be the best bet. However, investors are advised to enter the market towards the lower end of the range suggested above to reap rich rewards from equity investment during 2014. the year 2014 promises decent returns on Equity investment provided you take informed decisions. A good long term investment opportunity is likely to emerge immediately before or after the General elections due in April-May 2014. Keep your funds ready to avail this golden opportunity.

I take this opportunity to wish you all a 'Very Happy & Prosperous New year 2014'. May you reap rich benefits during the year on your Investment portfolio

Markets in election mode: Expect extreme volatility ahead

While the economy continues to be in doldrums equity markets are celebrating! Much of the euphoria stems from the fact that a majority of the analysts, including foreign brokerage houses, have heavily pinned their hopes on BJP returning to power at the centre. The markets have already discounted a victory for BJP, hence any hiccups to BJP's hopes in the run-up to the elections will lead to increased volatility in the markets. The outcome of the state polls on 8th December may spring up a few surprises as well.

 

Nifty, despite flirting with the lifetime high several times, has so far failed to clear the summit of 6357 in the current rally. Nifty is currently moving in a tight range of 5950-6300. The markets are looking expensive at the upper end of the range and are likely to break-out on the downside after the initial euphoria. The valuations of leading sectors like FMCG & Pharma & IT are looking extremely stretched at these levels. Long term investors are advised to avoid fresh investments at the current levels. The risk reward ratio will turn attractive only after a break-out below 5950 levels. Although the chances of markets seeking sub 5000 levels on Nifty are ruled out, we may see levels of 5500-5600 during the last quarter of FY 13-14. These levels would be a good opportunity to accumulate quality stocks from the sectors of the next bull run. The next bull run may be led by Energy (Oil-Gas, Power, Unconventional energy such as Wind/ Solar power), Infra & Development (Roads, Ports etc.),  & Financial sector.

 

For the coming month, the focus will continue to be on the outcome of state elections in India, RBI Monetary policy and the QE tapering announcements by US Federal reserve. The movement of the Indian rupee will also influence the market direction to a great extent. The voters may be in the process of re-defining the ABCDE of Indian polity. The 'Aam Admi' could spring up a surprise leading to a 'Debacle' for BJP and 'Extinction' for the Congress. I would prefer to wait on the side-line as election expectations lead to a shooting up of 'Vix' due to increased volatility.

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.