Prognosis for Samvat 2071: Expectations from the Bull Market

Sensex and Nifty have given a 26% return during Samvat 2070, making this Diwali a special occasion to rejoice for the Bulls. The Mid & Small Cap indices have given even better returns in excess of 50% over the past one year. Most of these returns are attributed to the 'Namo effect', whereas the economic turnaround is still a few quarters away. With the front line indices scaling new highs at the end of October 2014, the risk-reward ratio is turning highly unfavourable, as the markets may struggle to produce similar returns in Samvat 2071.

 

There seems to be a consensus amongst analysts with respect to the start of a 'Secular Bull run' in Indian equity markets. Yet it is my duty to sound a word of caution: it is quite easy to lose money in bull markets as well, if we show disregard to the risk-reward ratio. Consider this: The average consensus on the Sensex/ Nifty levels for Diwali 2015 are 30000/ 9000 respectively, and the current level of these indices are 27866/ 8322 respectively. From hereon this would result in an annualised return of 8% for the year if fresh investments are made at current levels. This kind of a return would be a shame for any equity market investor, because he can earn this return on a Bank fixed deposit, without taking virtually any risk. If we are investing in equity markets we must look for a 15-20% return, specially when we are in a secular bull market.

 

Although investors who could not join the party in Samvat 2070 may be feeling left out, yet they are advised to exercise caution at current levels, and should think of entering the markets only on meaningful corrections as and when they come about. A 10% correction from current levels could take the Nifty towards 7500 which would be a good level to make fresh investments. Any decline below these levels could be an added bonus. Investments made at these levels could fetch you the desired 20% returns in Samvat 2071, a just reward for equity investment in a bull run. As the international cues are likely to turn negative sooner than later, a reasonable correction may not be too far fetched. Wishing all investors a Happy Samvat 2071. 

REITs: An investment opportunity for Diversification

Investors in India have always enjoyed a fancy towards investment in Real estate and Gold. And they have been richly rewarded over the past decade in terms of handsome capital appreciation from both these asset classes. The inclination of the investors towards investment in 'Real Assets' over 'Financial Assets' has resulted in dwindling of retail share in Stocks and Bonds over the years. However, with the revival of sentiment led by the formation of a stable Govt. at the centre, retail investors are once again flocking the equity markets. It is a consensus amongst analysts that India has entered a multi year 'Bull run' for equity markets, and returns from investment in Gold and Real estate may not match the equity returns in the next 5 years at least.

 

Although real estate continues to be a major diversification/ hedging tool, the phenomenal rise in real estate prices over the past decade has pushed this investment out of the reach of the common investor. To bridge this gap REITs (Real Estate Investment Trusts) are finally taking shape with the announcement of norms governing REITs by SEBI last week. REITS are one of the most important vehicle for making collective investment in Commercial Real Estate. Originated in USA in the 1960s as a tax transparent investment opportunity, REITs have made their entry in most developed countries and have done remarkably well. REITs legislation exists in 37 countries apart from India and the combined investment is close to US Dollar 100 billion.

 

REITs legislation in India will enable easier access to funds for cash-strapped developers and create a new investment avenue for institutions and high net-worth individuals. All REIT schemes, to begin with, will be close-ended real estate investment schemes that will invest in property with the aim of providing returns to unit holders.The returns will be derived mainly from rental income or capital gains from real estate. REITs will be allowed to invest in commercial real estate assets, either directly or through special purpose vehicles (SPVs). According to SEBI guidelines a REIT will be required to have assets worth at least Rs.500 cr. at the time of an initial offer and the minimum issue size has to be Rs.250 cr. The minimum subscription size for units of a REIT on offer will be Rs.2 lakh and at least 25% of the units have to be offered to the public. Subsequently, REITs can raise money through follow-on offers, rights issues or qualified institutional placements and the trading lot for such units will be Rs.1 lakh. To ensure that REITs generate continuous returns, SEBI norms stipulate that at least 80% of the REIT’s assets have to be invested in completed and revenue generating properties. SEBI board also approved the launch of InvITs (Infrastructure Investment Trusts), which are somewhat similar to REITs. These REITs will be listed on Stock exchanges and would be traded based on their NAVs.

 

We may see the launch of a few REITs in India by the end of this fiscal. Embassy Property Developers, which is planning a $2 billion REIT with global private equity firm Blackstone Group, is planning to list it in India sometime next year. Investors may gear up for this Real estate investment opportunity with a minimum investment of Rs.2 lacs and reap the benefits of real estate appreciation, with complete transparency and adequate liquidity.

 

 

Markets always test the patience of investors: Be prepared

Indian equity markets have had a one way rise ever since the exit polls announced the formation of a Modi led Govt. on 12th May 2014. Many investors who were sitting on the side-lines to take a plunge have a feeling of 'having missed the bus'. There is a general consensus amongst analysts that we have entered a secular, multi-year bull run. Retail investors are getting restless day by day as they have hardly been afforded an opportunity to enter the markets a lower levels. The markets have a tendency to test the patience of the investors: whether they are in a bearish mode or bullish mode.

 

You would recall that during the bearish phase from 2008-2013 markets gave ample opportunities to investors to book profits during intermediate bouts of recovery. Similarly, in the current bull phase also markets are likely to provide attractive opportunities for entry by offering decent correction from the recent highs (from 26000 levels on Sensex and 7800 levels on Nifty). The broader markets seem fully priced at the current levels and are showing signs of fatigue. Whenever a correction happens it is going to be a reasonable correction of at least 10% from current levels (The mid and small cap stocks could react more on the downside). Retail investors are advised to be patient and await an opportunity to enter the markets on decline.

 

The result season so far has been satisfactory, but the companies declaring results in the month of August could surprise on the negative side, as the investment cycle has still not reversed. The markets have so far ignored the negative factors: Delayed monsoon (El Nino effect) and the Global tensions (from Gaza to Ukraine to Iraq). If the things do not improve from hereon, we could be in for a prolonged period of high inflation and higher interest rates, ultimately leading to earning down-grades. But there is no denial of the fact that we are in a strong bull market and every reasonable dip in the markets is a buying opportunity for long term. Retail investors who are afraid of timing the market are well advised to invest in the markets through Mutual Fund SIPs.

Making sense of the BSE Sensex

With the formation of the new Government bulls are back on Dalal Street with vengeance, and the Sensex and Nifty have been scaling new peaks day after day. Fund Managers and Foreign brokerages are busy making new predictions about the Sensex. Some are suggesting Sensex moving towards 30,000, 50,000 and 1,00,000, leaving retail investors amused as well as confused. It would be worthwhile to track the history of the Sensex to help us understand the returns that could be made from equity investment in India.

 

The BSE Sensex was formally launched in 1986, with the base as 100 in 1979. In fact the actual recorded value of the Sensex was 124.15 on April 3, 1979.  History of the Sensex suggests that the Sensex has been doubling itself every 4-5 years in its 35 years of existence. Please view the table below for the Sensex performance till date:

 

Year                 Projected Level                   Actual Level             Corresponding Nifty Level

1979                    125 (base level)                         124.15                                -

1983                    250                                             212                                     -

1987                    500                                             510                                     -

1991                   1000                                           1168                                    -

1995                   2000                                           3261                                 990 (base 1000 on 3.11.95)

2000                   4000                                           5001                                 1528

2005                   8000                                           6493                                 2035

2010                  16000                                         17528                                5249

2012                  20200                                         17404                                5295

2014                  25500                                         22386                                6704

2016                  32000                                             ?                                       ?

2021                  64000                                             ?                                       ?

 

BSE Sensex was launched in 1986 when equity cult was virtually non-existent in India. Dhirubhai Ambani was a pioneer in promoting the equity cult amongst Indian investors with the Public offering of his flagship company Reliance Industries. Equity investment received a big fillip when the Narasimha Rao Govt. unleashed a series of liberalisation measures in 1991 paving the way for huge investments by Foreign investors in India.

 

1. 1979-1995: During the first few years of the Sensex from 1979-1995, Indian economy was in an underdeveloped stage and a catch up rally in the markets was evident as India was trying to catch up with the developing economies. Inflation rate shot up to over 10% in the first few years of the liberalised environment, as administered pricing mechanism crumbled. Inflation averaged a high 10.6% in the period 1992-1996. I have assumed an average compounded growth of around 19% pa during this period, leading to doubling of the Sensex every 4 years.

2. 1995-2010: By the middle of 1990's India had joined the club of emerging markets known as BRICS. Inflation started to moderate and Indian economy was put on a high growth path. Sensex growth which was tepid till 2004-05, gained momentum under UPA I led by Manmohan Singh. Singh started his second term with a bang but growth momentum slipped under UPA II due to policy paralysis. Inflation averaged a moderate 5.4% during the decade 2000-2010. I have assumed an average compounded growth rate of 15-15.5% for this period, leading to doubling of the Sensex every 5 years.
3. 2010-2021: The Sensex virtually went into slumber after recording the highs of 21000 in January 2008, and eager investors had to wait for over 5 years for Sensex to decisively go past the crucial 21000 barrier. This resulted in the Sensex slipping below the long term trend line. As India continues to be an emerging market it would be safe to assume a return of 15% plus for the current decade also, leading to the Sensex doubling in 5 years. However, due to the policy paralysis during the last 2 years of UPA regime I have chopped off one year from the decade, leading to the doubling of Sensex in 6 years between 2010-2016. However, with the growth momentum returning back after installation of a strong Govt. it could again double in the next 5 years to 2021. Based on this simple analogy, I expect the Sensex to be at 32000 by 2016 and 64000 by 2021. The corresponding levels of Nifty would be 9500 and 19000 respectively.

Ironically, the Sensex movement does not give weightage to the dividends declared by companies. Currently, the Sensex companies have a dividend yield of around 1.4%, which is over and above the Sensex/ Nifty absolute numbers. So if equity investment is giving you an annualised return of 17% (including dividend) why look elsewhere. The other competing investment avenues like Real estate and Gold would now take a breather and bank deposit rates would move southwards. As growth returns in Indian economy, equity investment would give better inflation adjusted returns as compared to other asset classes. However, there would be hiccups in the upward journey, which should be used at entry points to invest in equity market for long term. Levels of 21000 on the Sensex and 6350 on Nifty are now going to serve as a solid base in this upward journey.

'Modi Sarkar' heralds a New Bull market

An unprecedented  victory for NDA in the elections cast a  spell of  fresh euphoria in  the equity markets on May 16, which led to BSE Sensex scaling a new high of 25375 and Nifty breaking the 7500 barrier to top out at 7557 levels. Most analysts have heralded this move as the start of a multi year bull market for Indian equities. A large section of the retail investors are feeling left out or 'having missed the bus'. What lies ahead for the equity markets after a path-breaking election result?

 

The election results have thrown a clear mandate in favour of one party after a gap of 30 years, during which the nation experimented with various coalition Governments. With the election results out of the way, markets will now focus on the economic developments: like Fiscal consolidation, GDP growth, Inflation management, Currency movement coupled with signals on the progress of monsoon. The track record of the previous Govt. in the past few months can be considered satisfactory in terms of having controlled the Current account deficit (CAD) and Fiscal deficit to a large extent. However, it failed to curb inflation, much of which is due to global factors. Indian Rupee has started to appreciate and any further appreciation beyond a reasonable level of Rs.58/$ could be detrimental for the economy as it may start hurting our exporters. Inflation management will depend largely on the progress of South-west monsoon with the threat of El Nino looming large at this juncture.

 

How would the markets move in the near term, say next 5-6 months? It seems the markets have fully discounted the formation of a strong Modi-fied Govt. in the next few days. So in the immediate future markets may consolidate in a close range or may go down a little after the initial euphoria. Sporadic bursts of euphoria could be dictated by the choice of key ministers like Finance & Commerce. In my opinion the markets have made an intermediate top at 7557 on the Nifty on Friday. But as a new bull market has started, the top of the previous bull market (at 6357 Nifty) would serve as a strong support on the downside. From an earnings perspective (discounting on the basis on FY 14-15 Corporate numbers) 6600-6800 could be considered as a pivotal fair value for the Nifty. The next trigger for the markets would be the presentation of Union Budget in July 2014, as also the earnings for Q1 which would start flowing from 2nd week of July. Satisfactory progress of monsoon is a necessary pre-condition for a bull run to sustain.

 

The probability of major indices moving up much higher seems capped due to the fact that while Banking, Infrastructure, Oil & Gas sectors would outperform the market, IT, Pharma, Metals would prove to be a drag in the short term due to Rupee appreciation. It is anticipated that Nifty may move in a wide range of 6350-7550 during the next 6 months. Those individual investors who feel that they have missed the bus could wait for some correction before committing fresh funds in the market. Please avoid the temptation to enter the markets at higher end of the range, only to regret later. It may be worthwhile to consider buying stocks from IT space on declines.

 

 

"Sell in May and go away"

There's an old saying in the  stock market: "Sell in May and go away". A  famous study   published in the American Economic Review in 2002 found that this  phenomenon does exist and  that returns on stock markets in 36 out of 37 countries studied from 1970 to 1998 were higher in the November to April period than they were in the May to October period. Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period. Will this strategy work this year also, more particularly with respect to Indian stock market? Let us analyse.

 

Let me state at the very outset that the worst is over for the Indian economy. The stock market has discounted this fact, but two critical events: the outcome of Elections 2014 and the progress of monsoon will play an important part in the much awaited economic recovery in India. Let us analyse the prospects in detail.

 

Election outcome: The on-going election campaign has been a bitterly contested affair so far with the 'war of words' reducing it to 'gutter level politics' on several occasions. International agencies like Morgan Stanley, Merril Lynch & others, known for their market analysis skills have jumped in the fray to prepare research reports on 'Poll outcome'. On the basis of these reports one can build 4 different post-poll scenarios:

1. NDA getting a clear majority with 272+ seats, leading to a strong 'Modi Sarkar'

2. BJP getting over 200 and NDA 240+ seats, with Modi leading a loosely held coalition

3. BJP failing to reach the magic figure of 200, and NDA falling short of 240 odd seats, leading to a sacrifice of Modi, and installation of a BJP led Govt. headed by somebody other than Modi

4. Congress on its own getting 125+ seats, and UPA crossing 150 seats, leading to a UPA led rainbow coalition of so called secular parties.

 

While the first and fourth options look most unlikely, we may be looking at option 2 & 3. I would like to throw my weight around option 3, based on Astro-analysis. The chances of scenario 3 unfolding after May 16 is based on following indicators:

• The planetary configuration in India indicates a fractured mandate in Election 2014
• While BJP will emerge as the single largest party, it will end up way behind the magical number of 272.
• The importance of UP in Indian politics is waning, and the next PM could be from Central India (may be Madhya Pradesh)
• Regional satraps from states on South-eastern coastal belt will play an important role in Govt. formation (Jayalalitha from TN, Jaganmohan Reddy from Seemandhra, Navin Patnaik from Orrisa & Mamta Banerjee from WB: one or more of these leaders will play a crucial role in Govt. formation).

Progress of Monsoon: There will be a lot of concern about the occurrence of El Nino, leading to a delay in advancement of monsoon in May-June 2014. There could be a possibility of drought in few states raising alarm bells over decline in kharif output. These fears will propel the continuation of higher inflation levels.

From the above analysis I am tempted to conclude that Indian stock market is likely to enter a temporary bear phase which is likely to last at least 36 days from 17th May 2014, lasting up to 21st June 2014. There is likely to be a delay in Govt. formation and the new Govt. may settle down only after June 21. At the same time the major adverse impact of El Nino will play out in May-June and is likely to subside by end of June. So investors are advised to "Sell in May and go away". But I still continue to maintain that FY 2014-15 promises to be an excellent year for equity investment and the equity markets are likely to resume their secular uptrend from August 2014. Position yourself to take advantage of the opportunity.

Disclaimer: I do not claim to be an Astrologer, the above analysis is based on my limited understanding of the subject, with a view to help investors take informed decisions on their investments.

Markets enter a critical phase: It's 'Namo' Vs 'El Nino'

Markets have closed the April series on lifetime high. The May series promises to be a cliff hanger as market participants eagerly await the outcome of the blockbuster election thriller. While the markets have almost fully discounted the 'Namo' factor and are heavily backing a BJP led NDA Govt. at Delhi after May 16, the 'El Nino' factor is yet to be analysed by the markets. I shall briefly discuss these issues in this post, and its consequent effect on market behaviour during FY 2014-15.

 

While it is given that BJP is going to emerge as the single largest party, but its overall performance needs to be judged through Astro-analysis. It is very difficult to gauge the public mood in a long drawn election spread over 36 days from April 7 - May 12, 2014, and as such opinion polls may not be able to give a clear picture of the poll outcome. In such a scenario Astro-analysis plays an important role. For BJP the election schedule is characterised by three distinct phases: Phase I which lasted up to April 15, was distinctly marred by infighting within the party. Phase II started from April 16 and is currently in operation, is the favourable phase of the Sun for the party and has led to the so-called 'Modi wave' which can last up to May 6. Phase III starting from May 6-7, may bring some unpleasant surprises for the party and may pose some hurdles to its supremacy. Varanasi has become the pivot of this election campaign and will decide the fate of General election 2014. 'Namo' had the option of taking a direct flight from Gandhinagar to New Delhi, but Amit Shah acting as 'ATC' for the BJP has diverted the flight via Varanasi, not-withstanding the turbulence in the skies of Varanasi. The final decision now rests with 'Har Har Mahadev' the Lord of Varanasi.

 

Now coming to the 'El Nino' factor. The most commonly accepted definition of an El Niño is a persistent warming of the so-called “Niño3.4” region of the tropical Pacific Ocean south of Hawaii, lasting for at least five consecutive three-month seasons leading to reversal in the direction of the Pacific trade winds. The brunt of the El Nino effect is faced by Asia due to weakening of the South west monsoon in the region. The chances of an El Nino occurrence during 2014 is predicted to be as high as 70%. Failure of monsoon may lead to a higher inflation rate in India leading to a hike in interest rates by RBI. This is likely to delay the economic recovery by at least 6 months. RBI Governor has already sounded the warning bell when he said:  “There are risks to the central forecast of 8% CPI (consumer price index) inflation by January 2015 stemming from less-than-normal monsoon due to possible El Nino effects.”

What should the investors do in such a scenario? Good times have returned to our markets after a long wait, so investors should make merry while the party lasts, but should be prepared to quit before the 'Hangover'. The markets are likely to peak out before the first week of May, and even if a strong BJP led NDA Govt. is installed after 16th May, the upside potential will be restricted to 3-4%, whereas the El Nino poses at least a 15% downside risk to the markets. In the final analysis it boils down to the fact that around 7000 levels on Nifty is a good inflexion point to book substantial profits: whether you would like to take a call before May 16 or thereafter is your choice!