Yo-Yo, that's the word that comes to mind when you look at the market's behaviour in the last week. There has been much written, and definatley much more spoken about the fall, the rise, and the crash. I am not going to repeat everything, nor am I going to predict anything about the near future, I am just going to use this entry as a tool to channelise and organize all the thoughts that I have:
Lets start with history, 2005 and early 2006 saw nearly a 70% rise in the market! A thing unheard of, nearly everyday was a new peak. What were the factors behind this boom?
Lets start with history, 2005 and early 2006 saw nearly a 70% rise in the market! A thing unheard of, nearly everyday was a new peak. What were the factors behind this boom?
- The India shining story: Phrase started by the BJP in the last elections, the story had a lot of ground to it. India is shining, never before have we seen so many choices thrown upon the Indian consumer, and never before has the consumer had so much power to avail the choics. The biggest reason being the growing middle class popluation, fueled by IT, BPO, and the manufacturing sectors. A growing buying capacity indicated growth in the economy, rising profit levels of India inc. and hence strong market returns.
- FII investment: Fuelled largely by the ultimate lack of any returns on debt investments overall in the developed world. The only place to get any returns was the stock market. The not so great condition of the European economy, and political unrest in other rising markets made India the obvious choice. Plus there were the returns and the tax benifits for the NRI.
- The emergence of the common investor: With FD interest rates hardly equating the inflation rate, there was no wealth growth in the debt market. Excited by the India shining story and the natural tendency to follow the leaders (FII, HighNetWorth individuals etc) the common investor jumped in the market.
- Funds ahoy: The logical outcome of 3 was the increased investment in Mutual Funds. With never before seen levels of investments the MFs went under high pressure to deliver.
- Misc: Including the govts promise to invest more in infrastructure, rising pharma market, emergence of a retail market, burgeoning malls and cineplexes.
The result was an amazing growth of the SENSEX index. Equity MFs posting yearly gains of above 80%, and huge forex reserves. But there were some pecularities in the market. Think the MFs, they come in various flavours. The standard growth option based on a diverse portfolio and targeted towards risk minimization posted equal gains to options that were aggressive and aiming towards midcaps, and rising stocks. Now, a standard growth option should give you realistic returns of about 22% in a normal year, and aggressive options should give you above 60% in a phenomenal year like the last one (according to most financial advisors). Assuming ofcourse, potent fund strategy, and competent managment. But what do we see? Aggressive and midcap funds have given lower or atleast equal returns w.r.t. growth options. Alarm bells, it is logical that bigger a company the lower can its growth rate be. A smaller company punches a lot more growth potential due to its small size and efficiency. A risk adverse growth fund should be investing in bigger companies, and when these companies are posting as big rises in stock value as smaller companies which had the potential to make it big, there is something amiss. It becomes apparent that the valuation of stocks of those bigger companies were based not only on their balance sheets but also the investor mentality.
So why does a stock rise, the fundamental reason should be the growing confidence in the company, confidence that promises higher profit levels on the coming balance sheet, hence promise of larger dividents and increasing net worth of the company. However, the reason that is prominent in the market is a different falvour of the fundamental one: what the investor thiks of the company. FIIs came in, and invested in the bigcaps, why, because they could not afford to go through the painstaking evaluation and researc that goes along with picking the best emerging stocks. They are not local, so they lack local knowledg and local presence. They did hire consultants, but their main aim was to make big money, and not let the capital erode. Investing in emerging companies has its own risks, so they preffered the bigger ones. Result, high growth the stock value of the leading companies, luring the common investor towards them and resulting in high valuation of the Index. With even the most liberal indicators and a bit of common sense it is apparent that the current bull run rate is hard to sustain.
So, when the FIIs saw problems back home they decided that now is the time to book profits. Since their home markets are not performing, the only way to keep their investor happy is to post highest possible gains even in a dipping home ecomony, so sell stocks that have a high value somewhere else, and keep your investor happy. Hence the big drawout. And now the herd chain starts, the FIIs pulled money, the common investor got scared, and why shouldnt he, he has liablities, he might have had loans against his shares, he might have invested with a fixed amount of capital appreciation in his mind, so he too withdrew, cashed his profit and decided to wait. Stop losses got triggered, banks sold shares against which they had given loans, and the market slid.
But a rather logical thing followed, the MFs, although their NAVs went down (since the stocks that the NAVs were composed of went down) they kept on buying, buying selling and buying. That might explains the rises in the stock markets early in every trade day. Its logical that MFs usually tend to do their buying as early as possible, since they are the ones who are dedicated more than the common investor to get up and go to the market. Why, coz its their core buisness. Plus, even though the FIIs have been net sellers, they have not been complete offloaders, they have also bought stocks and hunted for bargains.
So how far have the market slidden, what does this mean for the DISCIPLINED common investor. If you had a portfolio started around begining 2005 and compromizing of 60% blue chips, 30% midcaps (medium risk) and 10% high risk stars you would see that you were still in the green. Even with todays stock prices, you would have posted atleast 25% profit. And 25% returns on your investment in one year, is exactly the thing a disciplined investor, with little amount of time to invest in the market should be aiming for. Speculation, riding the tides, market surfing and all that is not the cake for your common investor. Who is busy with something else in the day, observes the market for not more than 30mins in a day, and makes his descisions with a long term in the view.
But as a smart disciplined investor, you should have also had your stop losses rising in sync with the indexex, and when the shares fell from their seemingly stable peak, you would have came out with some cash in your hand. There is support for the market at 10000 level, and if you are smart you will buy back your shares (putting further stop loss that still keeps your profit level acceptable) and wait withthe cash you just made to see if the market falls even more. If it does, you would have reinvested some of the profit cash (keeping your predetermined profit levels aside and safe in the debt market) in shares that you thought were worth it.
In times like this, and a growing economy like India, it pays to be smart and disciplined.
But what about the future, will the stocks rise? Rise they will, because the economic fundamentals are in place, but how early and in what fashion.
So why does a stock rise, the fundamental reason should be the growing confidence in the company, confidence that promises higher profit levels on the coming balance sheet, hence promise of larger dividents and increasing net worth of the company. However, the reason that is prominent in the market is a different falvour of the fundamental one: what the investor thiks of the company. FIIs came in, and invested in the bigcaps, why, because they could not afford to go through the painstaking evaluation and researc that goes along with picking the best emerging stocks. They are not local, so they lack local knowledg and local presence. They did hire consultants, but their main aim was to make big money, and not let the capital erode. Investing in emerging companies has its own risks, so they preffered the bigger ones. Result, high growth the stock value of the leading companies, luring the common investor towards them and resulting in high valuation of the Index. With even the most liberal indicators and a bit of common sense it is apparent that the current bull run rate is hard to sustain.
So, when the FIIs saw problems back home they decided that now is the time to book profits. Since their home markets are not performing, the only way to keep their investor happy is to post highest possible gains even in a dipping home ecomony, so sell stocks that have a high value somewhere else, and keep your investor happy. Hence the big drawout. And now the herd chain starts, the FIIs pulled money, the common investor got scared, and why shouldnt he, he has liablities, he might have had loans against his shares, he might have invested with a fixed amount of capital appreciation in his mind, so he too withdrew, cashed his profit and decided to wait. Stop losses got triggered, banks sold shares against which they had given loans, and the market slid.
But a rather logical thing followed, the MFs, although their NAVs went down (since the stocks that the NAVs were composed of went down) they kept on buying, buying selling and buying. That might explains the rises in the stock markets early in every trade day. Its logical that MFs usually tend to do their buying as early as possible, since they are the ones who are dedicated more than the common investor to get up and go to the market. Why, coz its their core buisness. Plus, even though the FIIs have been net sellers, they have not been complete offloaders, they have also bought stocks and hunted for bargains.
So how far have the market slidden, what does this mean for the DISCIPLINED common investor. If you had a portfolio started around begining 2005 and compromizing of 60% blue chips, 30% midcaps (medium risk) and 10% high risk stars you would see that you were still in the green. Even with todays stock prices, you would have posted atleast 25% profit. And 25% returns on your investment in one year, is exactly the thing a disciplined investor, with little amount of time to invest in the market should be aiming for. Speculation, riding the tides, market surfing and all that is not the cake for your common investor. Who is busy with something else in the day, observes the market for not more than 30mins in a day, and makes his descisions with a long term in the view.
But as a smart disciplined investor, you should have also had your stop losses rising in sync with the indexex, and when the shares fell from their seemingly stable peak, you would have came out with some cash in your hand. There is support for the market at 10000 level, and if you are smart you will buy back your shares (putting further stop loss that still keeps your profit level acceptable) and wait withthe cash you just made to see if the market falls even more. If it does, you would have reinvested some of the profit cash (keeping your predetermined profit levels aside and safe in the debt market) in shares that you thought were worth it.
In times like this, and a growing economy like India, it pays to be smart and disciplined.
But what about the future, will the stocks rise? Rise they will, because the economic fundamentals are in place, but how early and in what fashion.
- The return of the FII?: Where else will they go? Brazil, mexico, russia etc are in political unrest, Europe is looking down, asia is bearish, and India promises growth.
- Global outlook: DOW posted gains on firday, if this is the end of a correction in DOW it might be also the end of a correction in BSE. So back com the FIIs.
- Strong economic fundamentals: Cheap labour, diverse labour, good talent pool are still there. Problems are seen though for sustaning growth rate, however India inc. has performed well in the past in managing these problems and entrepreneuring new solutions. So good economic fundamentals and growth rate of GDP of atleast 7% should be realistic.
- Rising expenses in India inc.: IT Salaries are rising, this might tip the balance sheet towards red, but the real story is with rising salaries the Indians are working harder than ever before. 10hr days are pretty much the norm, attrition is strong, indicating a growing demand for talent. Not many permenant jobs abroad for IT, indicating retaining or returning of foreign educated talent (at higher rates). Growth in training centers, indicating better skills in employees. HR ppl looking at less attrition prone sections of the educated class to enter IT, e.g. BSCs BAs etc. They are even willing to train them. All these point towards a growth phase when India inc tries to stabilize itself and ensures that sustainable growth can be achieved. This will cost money, so dont expect the next two years balance sheets to go very green in the IT sector. Stock value rise is still promising, but not as high as recent past. In a long term view go very bullish.
- Rising consumer power: But on the other hand, increasing salaries, and widespread job market indicates growing consumer power. Emerging middle class, keen on spending in the consumer goods market. Sectors to look out for Fast moving consumer goods and durable consumer goods. Growth is obvious. But the sectoral market is diverse, profit levels are not even accross the sector. FMCG funds might be a good idea.
- Energy market: ONGC, RELIANCE etc all investing in new projects, indicates reallocation of capital in milking cows that wont milk untill they come of age. So patience and long term is the view in the energy and power market. On the other hand, the demand is huge for energy, so there will be pressure to perform, expect slow growth this year.
- Infra growth: The infra growth in the past two years has been dissapointing. The mixed UPA govt with a strong left wing is not able to make reforms at the pace it was expected to. This will continue atleast till the next election. But there is demand for improved infra, infra is hitting our economy and Manmohan and his gang know that. Hopefully slow but solid growth.
- Airlines: They dont come recommended for the common investor, unless ofcourse you really know the business. Airline business is tricky, the growth will be tremendous (around 25%) but whether profits will rise is a question. There is a fare war, rising oil prices, and new entrants. All might last, but whether all will show profits is a question. Be aware of mergers. There is a requirement for airlines to market their business better, but right now they are in a capital acquisition phase (buying airliners, developing airports etc), once this is done there should be more spend on marketing and hence rise in profit. Go bullish but with a long term view.Deccan IPO, dont buy unless Deccan shows better profits. Jet, maybe a good buy next year. Within a couple of years expect TV ads for airlines and easier ticket buying systems. As soon as they are aired, go bullish.
- Metals and oil (commodities): Hmm, hard to say, there is demand, but.... I am going to steer clear of this one, coz this is one of the markets where you need a helluva lot of inside info.
- Index growth: Considering all this, the general sentiment this year should be of the bull, but a cautious one. The markets will rise, but not as fast as last year, one can hope for a stable growth, but indicators show that there will be some yo-yoing. Atleast everytime untill some other unforseen or ground braking factors jump in.
One thing is clear, you cannot expect a decent oldage income, and wealth generation with investment only in the debt market, you must expose yourselves to equity, atleat to MFs. Oh yeah, and btw, buy as much real estate as you can as fast as possible. Not to worry about the casual ups and downs in the real estate market, they should give in to a big upwards looking arrow down the track.
I must in the end draw a clichè conclusion, DISCIPLINE is the key to make your wealth grow in the Indian equity market, or for that matter any equity market. But as clichèd the conclusion is, unfortunatley it is not yet understood by you and me......
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