You cannot gallop for too long soon you would need to pause. The pause however doesn't signify any physical impairment. It could be analogous to a lull before the storm. Stock markets in India seem to be experiencing a similar situation.
The India shining euphoria or FDI maneuvering catapulted the market to an unprecedented level - The market participants looked at each other in utter disbelief. The rise was so sudden that it sparked and spawned doubts about its sustainability. What happened after the psychological storm swept everyone off their feet is history now. As the latter development proved, nothing had gone fundamentally wrong with the economic factors and that it was the proverbial sense of insecurity which has beset homo sapiens from the time they said good bye to nature and opted for culture. The experts feel and rightly so, people can look forward to a more robust market in not too distant future.
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The Mid May Stock Market mayhem was not caused by any weakness in the micro or macro fundamentals impacting the market. It was by and large a psychological phenomenon. The market participants just couldn't believe that the market could scale the heights it reached before it plunged into scary depths. Everyone felt sort of personally obliged to make the best of the situation so long it lasted. Their greed glands overworked and eventually overwhelmed them and they all succumbed to selling impulse without pausing to reflect on the real situation.
Nothing has changed fandamentalally, since then and the market is again set to climb the same levels from which it had recently receded. This goes to prove that nothing wrong or seriously adverse had happened at any point of time to warrant mass psychological breakdown or lack of confidence in the strong economic fundamentals which people and publications have been proudly chanting in every corner of the country.. Perhaps it was just nature conforming to its laws that whatever goes up, has to come down and it is like that when you stretch a spring to its fullest level, you are going to experience strong pull-back effect and that is what we experienced in the shape of volatility in the markets in May and June
The month of July saw the volatility subside comparatively and the markets have slowly crept up to the respectful level of 11500 . Markets experts are pointing towards a level of 13000 without however putting a time line into it. While Mr. Naganathan of DSP Merill Lynch believes that market would bounce back by summer of 2007, Morgan Stanley has recently issued a report saying that market would go up to 12,500 to 13,000 by last quarter of 2006-2007. As experience tells us we should not get too hung up on the time by which market will cross its peak, we should continue to repose faith in equity as an asset class which will give us higher return in the long term than other asset classes (including real estate) and therefore we should continue our business of investment through Systematic Investment Plans so that we do not have to bear the botheration of the market timing
Look back and reflect on what happened in the past 3 months, It was where we experience an important inter play of economics and psychology, where the technical and fundamental correction of market got corroborated by the psychology of investors disbelieve in the market levels of 12 and half thousands. What looked like a mirage and a dream in the mid May ,after 2 to 3 months of correction looks like a real possibility....
At any point of time, there are a number of positive and negative factors which need to considered before taking investment decision . Fundamental of Indian economy are strong enough to make us believe that within six months to one year the market is likely to surpass all previous levels..
Positive Side
On the positive side, most Indian corporate, large and small alike, have reported excellent performance in recent quarters, despite high pressure from cost side. High wages, energy prices, raw material prices have all been absorbed well due to (a) high volume growth and (b) efficient utilization of resources. The demand for both consumer and capital goods is not showing any signs of slowing down.
A large number of Indian corporate are expanding their operations overseas through acquisitions and otherwise. These companies would therefore be not dependent on any one country or geographical region for their growth. We can therefore reasonably expect the corporate performance to remain robust for rest of the year also.
The demographic profile shall prove to be the strongest point for Indian economy. A highly young and energetic population would compensate for a number of shortcomings. If properly channelized, this vast reservoir of energy, that will remain filled to the neck for next 4 decades at least, could translate into wonders for the Indian economy. Availability of cheaper skilled workforce would keep India competitive (a) in terms of wage rate and (b) also in terms of the huge domestic demand that will be generated by over 500 million earning hands.
Insofar as the flow of foreign investment is concerned, there is nothing to worry about. For (a) the total investments made in India by these investors is miniscule if we look at the size of their total portfolio; (b) India would remain one of the fastest growing economies in the world for next 2-3 years at least. So under compulsion they have to include India in their overall investment strategy; (c) FIIs, since they were first allowed to invest in India in 1991, have never been net sellers on annual basis (excepect for 1998 when they sold US$400 million worth of stocks due to international sanctions post nuclear blast; (d) the volatility caused by the hedge funds, which form roughly 4-5 per cent of the total FII investment in India, could be easily checked through
rational regulation for which SEBI appears to be trying. For example, if SEBI and the government take step to regularize roughly US$25-30 billion worth of unofficial badla market operational in India, the dependence on hedge funds would reduce considerably.
Moreover, the interest rate cycle is already showing a sign of turning down in the US. Once the soft interest rate regime begins to take shape again, the global liquidity should improve.
The strategy
(a)Cyclist should avoid highways
If you are a bicycle rider, you should not race with the heavy lorry drivers running on high ways. Meaning, an individual investor must never try to follow the strategies followed by institutions, fund managers, large traders like Rakesh Jhunjhunwalla etc. You should strictly remain in the cycle lane (meaning value and income stocks) and not go for high risk-high reward kind of investments.
(b)Select cash cows
In the high interest rate, the debt free companies which have large amount of cash in hand to invest should be preferred. The companies like ITC, M&M, Infosys, Bajaj Auto are more likely to do perform better by getting high returns on their treasury portfolio.
(c)Avoid buying lottery tickets
Real estate, construction, metals, sugar in all sectors have recently witnessed a hyped market. Most stocks have given astronomical returns in past two years. However, the lottery story is over in most of these stocks and they should by and large perform with the market. In most cases, these stocks should under perform due to high level of distribution. Investors and traders should avoid these stocks, and if holding should get rid of these stocks at earliest. IT, Pharma and FMCG stocks with a stable business model should be preferred in these circumstances.
(d)Be systematic
Although a systematic investment is ideal in all circumstances, in the current market scenario it assumes even more importance. Investors should select, stocks and mutual funds they want to invest in and spread their investments systematically over a period time, let's say 4-6 months at the least.
(e)Invest in short term debt instruments
The current high interest rate scenario might last for 9-15 months. In these circumstances it is better to invest in short term income funds and short term fixed deposits. Once the interest rate start stabilizing or softening, the long term debt fund may repeat performance of 2002-2003. A shift to these funds may be considered after six months or so.
(f)Bet on youth
The Indian youth is going to be a dominant force, not only in India but also globally. The companies targeting the Indian youth therefore should do well for next 7-10 years. Long-term bets, therefore, should be placed on these companies. Telecom, denim, beverages, cigarette, financial services, education and training, film and media, are some of the sectors that will gain maximum from this higher spending by youth. Bharti, Reliance Communication, Arvind Mills, McDowell, Shah Wallace, ITC, ICICI Bank, Reliance Capital, Aptech, NIIT, Adlabs are a few companies one should buy at every fall.
(f)Do not worry about the Sensex graph
Though Sensex is an important barometer of the overall economic situation, one should not get unnecessarily intimidated by the wild movements of the Sensex on day to day basis. These movements are consequence of a host of domestic and international social, economic and political events. Most of these events may not be relevant for the company you have invested in. So long you have faith in the fundamental strength of the company, you need not bother about the Sensex movement.
Remember it is profession of the pink paper journalists and studio experts to speak/write daily about the market. They are no philanthropists. You are under no compulsion to hear/read them on daily basis.
