This analogy, in many ways, sets the theme for the year in 2007. Both the surge (46% annually) and the speed (a 1,000 points spurt in just seven days at one point) of the Sensex climb, have been near magical. Real estate prices in certain locations have more than doubled in a year. Art is emerging as a mainstream investment avenue with returns far outpacing other asset classes.
By that kite logic, now is the time to consolidate the flight and get ready for another. Analogies apart, signs of consolidation are evident. Interest rates, one of the key indicators, are set to rise as inflation rates catch up, and RBI exercises its options. And interest rates have a telling effect on the direction of investment returns.
On the stock markets, analysts and fund managers speak of consolidation as a moment to catch up breath while running full steam. Indian equities are expected to deliver more of a secular performance over the next year. Moreover, the times are changing from 50% returns to more realistic returns.
On the other hand, corporate earnings have witnessed upward revision for almost 17 quarters now. Experts reckon that the growth in earnings for 2007 is already factored in the indices at these levels. The indices are quoting at around 22 PE on the trailing 12 months earnings and enjoy a forward PE of 17 based on FY 2008 earnings estimates.
These levels show that the markets have discounted almost all positives. The consensus estimates show an upward movement of around 15 to 20%. Also, most of them mention that this upward movement is possible only if markets realign the forward PE taking into account the FY09 earnings estimates. This is likely to happen during the second half of the next year.
Corrections in 2006 have taught investors that the money-making business is no longer simple. There is a dire need to differentiate between investing and gambling. The year ahead is expected to reward those who are disciplined in their investment activity.
Fundamentals, more than anything else, will drive the returns an investor will pocket. More than the announcements from the companies, it is the execution of those plans which will ensure growth in corporate earnings. The times ahead will ensure that instead of the market as a whole, individual businesses are to be tracked. The earnings growth of individual companies is expected to reward investors.
There is a lot of action expected in information technology and allied services. The weakening dollar is not expected to hamper the IT companies, as the volume growth and margins expansion will ensure that the profitability will remain intact, if not improve. The growth is expected to remain double digit in the next couple of years, boosting earnings.
Also, one can look at the input industries of the infrastructure/engineering sector. The cement industry is one of the key beneficiaries of this boom in the infrastructure industry. The input industry logic also brings forth the power sector EPC players along with the cable and transformers manufacturers to the fore.
One can have a look at these sectors with a couple of years perspective. However, valuations are a bit steep in case of some of the companies. The MNC pack, especially after the proposed delisting guidelines, is another opportunity for the investor.
For investors who are not so savvy, mutual funds will keep offering opportunities for investments. Systematic Investment Plans or SIPs that have gained attention over the last couple of years, continue to remain the bulwark for investors. Fund managers recommend a stronger dose of equities while choosing investment portfolios amongst SIPs.
While consolidation happens, it does not rule out opportunities for handsome returns. Investors wanting to ride these momentary waves, could therefore do well by maintaining liquidity by investing in liquid schemes. These schemes offer high liquidity and low risks as they invest in short-term call money market. They are better than a savings bank account. And, at times, as seen on December 30th when the call money market rates spiked, provide returns as well. Events like advance tax payments are also seen as times when the short term market spikes.
The year 2007 is also expected to see an increase in structured products in the industry. Already, players like ING Vysya and UTI Mutual Fund have begun offering products that are linked more to asset allocation rather than pure stock picking.
On the fixed income instruments front, not much action is expected. The options remain the same. While a healthy dose of fixed income instruments are recommended for tax planning, political pressures are expected to see that rates on provident funds will not dip, despite the government losing money on them.
In fact, political pressure will be a key determinant in 2007. This is the year that the ruling party gets to build its election case - a good time to play to the gallery. While largely economic sense has prevailed over political compulsions, investors could see some regulatory moves and rapid actions stirring up the economy. So while fundamentals speak of a consolidation, other policy matters could turn the equation around and be the jack-in-the-box. Opening up of the pension sector will be a trump card. The liberalization on the pension industry will offer the much needed social impetus to Indians at large. It will also rustle up monies that could head towards various investment avenues like stocks, traditionally not available to the pension funds. This in turn could create buying and fuel a surge, or at least provide more support to the stock market.
In fact, to a large extent, inflows in the market will determine chances for super-normal returns. Real estate is one area that is bound to see stronger inflows than before. A release from the Alternative Investment Market (AIM) of the London Stock Exchange, says 11 companies with operations in India have been listed so far on the AIM and have raised around $1.25 billion. This will be invested in the real estate market in India. Then there other private funds lined up. With Indian real estate funds also ready to invest, demand for property could outpace supply, at least in 2007.
Then there are rumours doing the rounds that the next Budget will see a reduction in personal taxation rates. This will free up more funds for investment and consumption. So overall, as the factors line up, it is time to brace for another exciting year ahead. All the best!