What’s our market view?
‘Rejuvenation in bad times’ would be the most appropriate way to describe the past two months – the government suddenly woke up from a slumber, the market participants gave a 2000 point salute to the government, voices in the dealing rooms got louder, celebrations on the sales floor was no longer a crime and last but not the least, our mailbox had the maximum investment related queries. The point of highlighting these observations is simple – interest in markets is highest when prices rise, when on the contrary, maximum money is made by investing in good companies in bad times. Hence, the subsequent discussion will be spent on doing exactly that – identifying opportunities that give a favorable risk-reward and investing in them.
What’s our market view?
First things first, the reforms agenda initiated by the government doesn’t sound a death knell for the problems that have beset our economy. As an illustration, FDI in multi brand retail may not translate into huge investments immediately, given the challenges in setting up the back-end support systems in India. The fine print on sourcing norms can also act as a dampener. Another such illustration would be the State Electricity Board bail-out package – the social and political fabric of the country won’t allow infinite price hikes. The last time such a package was announced, it took four years gain momentum, only to lose steam later in 2007 and metamorphose into a crisis in 2012. On the contrary, some measures like deferring the GAAR, diesel price hike and strong focus on achieving fiscal consolidation are credible and concrete in nature. The implications for our markets are twofold – firstly, it sets a floor to the pessimism and secondly, any concrete improvement in macroeconomic environment will be greeted with strong up-moves. So the million dollar question, as always, is if THIS is the right time to buy stock? A zillion dollar reply is ‘individual investors should not look at markets as a homogeneous entity; instead they should focus on companies that have strong earning visibility’.
For India, the root of the problems still revolves around inflation and deep rooted policy sham. To keep the long story short, real interest rates won’t come down till inflation softens and inflation softening can only happen in two ways 1) global cool-off in commodity prices, especially oil, and 2) genuine demand destruction at the end-consumer level. Both the cases look a little unlikely in near future given the humongous liquidity generated through QE3 and similar European packages and consumption demand continuing to remain high as the job markets in India are still doing reasonably well. While it’s difficult to ascertain the contribution of excess global liquidity to the current market rally, it surely has a strong role.
Which sectors/ themes do we like?
It may not be the best time to buy into high risk sectors like PSU Banks, power generators, real estate, aviation, infrastructure and they are best avoided, until such times that risk-reward turns favourable.
Being left out is one of the worst feelings to live with, even in the stock markets! It forces you to take desperate and generally below-average decisions. In case you repent your non-participation in the rally in some of the high beta plays such as HDIL, Oriental Bank, DLF, Union Bank, United Spirits, Kingfisher, etc, you should look at the two or three year price chart. You will be amazed to see the odds of you making money in these stocks had you bought during any random day during the last three years. You would have lost a sizeable amount of capital, keep aside the time value of money, had you bought during major portion of 2011 and 2012 and stayed invested till date! One may argue that the distressed price could be an opportunity and the turnaround could be real. While this can be true, the signs of a real turnaround in business fortunes are at best hazy and betting on turn-around in these high beta sectors is only slightly better than gambling.
Trivia – How the rich got rich?
Although we all define and calculate success differently, most of us would like wealth to factor into our equations, and hence we continue to define richness in terms of wealth. While there are zillions articles and books on how to become rich, this small section our memo only aims to re-activate some basic principles you have learnt long ago. We came across an interesting article by Jeff Haden which gives a cross-sectional analysis of sources of income of some of the richest people in United States. In 2009 it took $77.4 million in adjusted gross income to make the top 400 wealthiest individuals. Where it gets interesting is how the top 400 made their money (% contribution to total earnings)
- Wages and salaries: 8.6%
- Interest: 6.6%
- Dividends: 13%
- Partnerships and corporations: 19.9%
- Capital gains: 45.8%
It does not require an analyst to tell you about the obvious conclusions. Although universally known, it always helps to reiterate the well know principals of money-making:
- Working for a salary won’t make you rich.
- Neither will making only safe “income” investments.
- Neither will investing only in large companies (stable dividend payment record)
Owning a business or businesses, whether in personal capacity or through stock investments, could not only build a solid wealth foundation but could someday result in disproportionate capital gains. Getting rich is the result of investing in yourself and others, taking risks, doing a lot of small things right and then doing one big thing really, really right. For most of us, that ‘really big right thing’ could vary from being as primitive as finding a very good advisor to as sophisticated as becoming a good investor though one’s own research.
P.S: Equity as an asset class in extremely rewarding in the long term, however only individuals who can bear interim volatility should invest in stocks. Kindly consult your investment advisor before acting on advice provided here.