The signs are ominous, since the beginning of the year the BSE Sensex has lost around 22%. And when the going was supposed to be exciting, two big IPOs were pulled out of the market and the Reliance Power IPO closed the listing day with a substantial loss. This was something that was not expected at all. Investors lost around Rs 2,000 crore of wealth on the listing day and for those who had speculated, listing day losses were around 37%. This has created some element of shock in the markets.
Even the government, in the year preceding the elections, was forced to increase fuel prices. And the possibility of the Reserve Bank of India lowering interest rates, which was supposed to bring cheer to the markets, seems to be pushed back due to an expected rise in inflation caused by higher fuel costs. Add to this, global fears of a US slowdown and the subsequent decoupling in the marketplace.
Turmoil seems to be around the corner. Though many experts do not sound it out openly, they are concerned, especially with regards to happenings in the global market place. ?Earlier we thought that the Indian markets were insulated from global dynamics, as even oil price hikes and other tremors did not stop the unabated climb. But now we seem to be following global cues, ?quips Prithvi Haldea, founder managing director of Prime Database, a company that tracks developments in the Indian capital markets.
?The developments in the Indian markets are definitely not pleasant,? says a noted investment advisor and leading thinker on the Indian markets, not wanting to be named. He cites the statements made by Jeremy Grantham (more on page 8), a noted global investment advisor, who reportedly managed Dick Cheney?s account as well.
Grantham, with a global reputation to predict nasty market downturns says most asset markets are a bubble now and they will collapse in the years to come and that there would be no hiding place available.
Rub-off
There are concerns on this front as well. The sucking out of liquidity and a break in wealth creation will also dent other asset markets, primarily the real estate and also others like art investments. The bubble in the real estate markets was largely inflated by the huge wealth created from the stock market.
Even here, interest rates play an important part. The large rally in real estate prices from 2004 onwards was witnessed because there were extremely low housing loans available in the market. Now, even though a certain set of companies have lowered their rates, they are not enough to build in another surge, or even support falling real estate prices. Builders with strong institutional funding are expected to hold on to their prices, but the smaller ones, wanting to cash out, will lower prices.
The real impact is expected to come from the global liquidity crunch. Excess liquidity, mostly created by leveraging of assets, will get sucked back and therefore a lot many funds that had isolated Indian real estate to be their investment destination will be pulling out. Investors who were planning to take a decision are better off waiting for a clear trend to emerge in the coming days, reckon experts. Once again, the emerging theme is to tread with caution and chase quality assets with strong history of execution.
Shuffling required
Grantham might have the prediction of the Internet and tech bust on his resume. At the same time, he is known to favour emerging markets as an investment destination. Globally too, Ben Bernanke, Federal Reserve chairman, and Warren Buffet, investment guru, have sent out innuendos to hint that the asset markets might not suffer to the extent it is made out to be. However, the need for caution is most advocated. It is a time to get concerned about your portfolio and take some precautionary action.
A portfolio review is what the financial planner would advise. Look for stocks which were advocated to you by your broker or your friends on the basis of the future potential, especially of their subsidiaries and those which have little or no earnings present at the moment. Clearly, the potential embedded value stories are the ones which would take a hit.
Moreover, a study carried out by Credit Suisse on the five major up-cycles dating back to 2001 depict that most of the sectors in the first bull-phase do not feature in the one that happens after a brief correction. The report says, ?Bull markets almost always lead to excesses, most present in its biggest out-performers. Bear markets mark particular chastisement of previous exuberance through sharp falls in erstwhile leaders. When the next bull-run assumes, it normally begins with more scepticism, apparent newly learnt lessons and more resolutions from most investors. This does not stop another boom or even bubble but rarely in the same counters and with same assumptions.?
After the growth-buying phase, the focus will now be towards value and also a mix of value and growth. Here, fund managers have their favourites. While the banking and financial services sector is stated to be amongst the top favourites, so would the capital goods sector and those riding on infrastructure growth be. Top rung IT companies are considered a contrarian?s choice, primarily because they have strong managements and have been beaten down in the euphoric times.
The pertinent point to note while shuffling the portfolio is to not change your asset allocations drastically. Asset allocation plans are usually made with your long-term goals and objectives in mind. So, unless there is a major change in these goals, it may not be worthwhile to be reactionary and take hasty steps that will deviate from these goals. After all, any strong market movement will have periods of rest or correction. This is a reality one needs to expect and not get deterred by the short blips.
Moreover, there will be more rational pricing expected from the IPOs hitting the market and this can be good news for those with a penchant for them. Also, there are quality offerings like UTI Mutual Fund, NHPC and ICICI Securities that will be on the offer. Experts also advise having a larger share of cash and near cash assets to participate in the rally when it emerges again.
The triggers
Motilal Oswal, CMD of Motilal Oswal Financial Services, a Mumbai-based stock broker and investment advisor, reckons that this could well be the time to buy stocks, especially for those who thought that they had missed the bus. The one year forward price earnings multiple is now at 16 times levels and this is quite near the 15.7 median for 15 years.
Haldea, while being optimistic about the market, advises investors to start factoring in a high amount of volatility. ?It?s here to stay as the market is not broad-based in terms of participants and also in terms of floating stock,? he adds. A 500 point up or downward movement should be the order of the day.
On the liquidity front, while global gloom is expected to continue, the Indian market will remain a lucrative destination, and funds after taking a reset break, are expected to come back. Moreover, it is expected that domestic liquidity will increase as this time around tax planning takes priority and insurance companies are known to pick 40% of their funds during this time of the year. Same is the case with equity linked saving schemes floated by mutual funds. These funds find their way to the markets and therefore are likely to bring in some succour.
Strong earnings could be another trigger here. But results in the third quarter cast a shadow of doubt on the quality of earnings as well. A study of 2,964 companies in the third quarter shows that revenues have grown by 18% over the same period in the previous year and earnings at 29%. However, other income, which emanates from non-core activities like trading gains, has risen by 63%, the highest for a long time. Other income, for the third quarter, was 39% of the profit before tax, up from the 30% level the previous year.
Lowering of interest rates is also a trigger much awaited by the markets and is expected that sooner or later the central bank will take steps in this direction. The biggest trigger, however, will come from the Union Budget slated to be announced on February 29. Market participants are looking at developments on this front very closely. It is expected that the budget will have several sops for investments and taxation norms will be eased, a year ahead of the elections.
So while the budget unfolds at the end of the month, it might be too early to set the panic buttons on, but being extremely cautious will not do your portfolio any harm.