?Greed is good,? observes Gordon Gekko, an Oscar winning fictional character from the 1987 film Wall Street. Thanks to the greed, all roads in India lead to Dalal Street where a lot of action is unfolding. Barring a few moments, for almost 16 quarters now, the Indian bull is incessantly running. The 1,000 point moves are no more discussed and celebrated as it has become a single digit percentage move and is now a norm. Keeping behind the volatility and the down circuit on the back of participatory notes issue, the Sensex is at its all-time high.
Cut Dalal Street. Scene change to Opera House, Mumbai?s diamond market, and the festive mood continues. Gold here is in an uptrend ahead of Diwali and the Rs 10,000 mark for a tola (10grams) is expected. Real estate prices are still firm and so is the case with other commodity prices, along with crude oil.
Policy matters
The credit policy is due on Tuesday, with a lot many questions to be answered. It?s not just about the monetary measures and interest rates. The markets are full of liquidity as too many dollars are chasing too few rupee assets.
The inflation on one hand is looking at sub 4% level, substantially below the policy targets and speculations are rife with a possible 50 basis points cut in the rates. The advocates of rate cuts have recently pointed out the slowdown in IIP consumer durable data. However, economists are pointing the ?faulty? construction of both the price index and consumer durable index.
Any rate cut from central bankers is certainly seen as a big positive for the equity markets, as it reduces interest cost of corporates, thereby improving the bottomline. The lower interest rates will also boost the credit demand and ultimately the demand for housing, autos and consumer goods. However this is too rosy a picture to paint.
Though Indian corporates have reported good numbers again in the second quarter ended September 2007, there are concerns on valuations. The market has factored in most of the positives at the current levels. Indian markets are now being compared with Chinese equity markets to substantiate the sky-rocketing valuations enjoyed by Indian equity markets.
Any negative step by the RBI or any new step by the ministry of finance to curb the dollar phase in the short term can put instant brakes to the speeding car of Indian equities. The last ten trading sessions is a cue of what can happen if foreign institutional investors were to pull out of Indian markets.
Especially for those who have been playing on the Nifty and a few hot stocks, things are to be carefully monitored. ?We have considerably reduced our bets on Nifty in both – cash and derivatives – segments. This is primarily because in the short term there seems to be a possibility of extreme volatility in these stocks,? says Ranjan Das, an investment advisory professional with a reputed wealth manager having global parentage.
Caution: Investing in progress
For some time now, experts are talking about ?cautious optimism?. However, now many of them are advising more of caution and less of optimism, at least in the short term. The growth at reasonable price is already replaced by momentum investing in some hot sectors. If you are holding such unidirectional bets, there are experts talking of taking home some profit, at least for traders and short-term investors.
There are two broad themes seen in the Indian stock market for some time now. The first deals with those Indian businesses that have global competitive edge and global presence -sectors like IT & ITeS, auto ancillary, generic pharma, textiles and other export oriented segments. As the rupee is appreciating against the dollar, thanks to the capital inflows, the sectors are being seen as under performers.
However, there are some seasoned players in the market going stock-specific in these sectors. ?Our long-term value portfolio has seen increased exposure to textiles and export-oriented non-IT sectors such as diamonds, leather articles manufacturers,? observes M Sathish, an analyst with an Indian brokerage.
The theme can be attractive if you understand Jesse Livermore who observed, ?The big money was never made in the buying or the selling. The big money was made in the waiting.? A word of caution this may appear attractive and many of us would like to catch hold of this theme and some of you may further take the way towards contrarian investing. Refer our take on some contra offerings in the market by mutual funds in India.
The second theme is of investing in the India story, businesses that are expected to benefit from consumption- or infrastructure-related activities in India. However, in most cases the valuations are discounting the best scenarios. Again, a stock-specific approach may work well for you.
The input industries investing rationale has proved well in the past. And there are chances that big money can be made in the input industries here. Players offering raw materials, equipment, technical know-how and support functions to high growth businesses are expected to do well. Experts reckon, the commodity companies may see good times in the medium term.
This is just about the equity component of your portfolio. As almost all asset classes are doing well simultaneously you need to revisit your entire portfolio. Your entire investment game plan should be revisited. Derisking within one asset class is just one aspect of the entire activity. There may be a need to rebalance your portfolio. A move from high momentum assets to assets offering better risk-adjusted returns must be considered.
Gold glitter
Commodities have been doing well for some time now. In India, we have seen a rise in investment in gold along with consumption of gold. The prices are rising and there are vehicles like ETF now available for you to take a position on gold, without physically owning it.
Gold, being a good hedge on inflation and a safer haven that acts as a store of value, can be considered for investment. Till the end of the festive season gold prices in India remain strong and you may end up getting good returns. ?We also had a significant exposure to gold for our clients. However, we have done partial profit booking in those accounts,? observes M Sathish. He adds, ?You can still hold on gold, but fresh long positions in gold are to be taken with clear stop losses.?
The real estate, on the other hand, is doing well. The rise in prices is taking place at a less pace compared to what it was a year ago. The bankers, however, in recent times went ahead and cut rates on new home loans to propel the demand for credit, and thereby housing. Any rate reduction by RBI will surely be a booster for the real estate prices.
The monetary policy will impact your fixed income portfolio. For the last couple of years, most of us have forgotten mutual funds schemes investing in debt instruments. Fixed deposits by banks have seen rate cuts in recent times. The double-digit rates on fixed deposits are no more available. If the central bankers opt for a rate cut, there is an investment case for income funds. Income funds are expected to reward the investors with fair risk adjusted returns. Investors who are willing to take more risks can park their funds in long dated gilt funds.
The party seems to be going on for a long time. However, one must be aware that all the ?killing? opportunities in the markets are accompanied by some of the ?not easily visible? risks. The India story is seen as one of the most concrete investment ideas on this planet. However, there are some bumps that one may come across. Valuations are stretched and analysts are now supporting them by factoring the next five years? corporate earnings, along with best possible growth estimates.
Oil slick
The Indian markets are no more immune from the vagaries of global factors. The de-coupling is yet to happen. Especially when the markets are being fuelled by foreign money in such a short time, it becomes all the more important to pay heed to global factors.
?We expect oil prices to remain firm till FY2008 end, and the domestic government policy of not allowing price increase of fossil fuels in India ahead of election may not sustain long. Also, the geopolitical pressures rising in the international arena can further press crude oil prices upwards, adversely impacting the sentiment for equities,? observes an oil and gas analyst with an Indian brokerage.
The crude is a key factor and a rise in crude oil prices not only will add to inflation but will also add to fiscal deficit, as the government is not really keen on passing on the price-rise to customers.
This will adversely impact the macro economic picture. If, due to curb on participatory notes, the capital inflows are impacted in the short term, there is a high possibility that the rupee will depreciate against the dollar and our oil bills will go up accordingly, worsening the situation. Higher the crude oil prices, higher the inflation. Higher the inflation, higher the interest rates, and higher interest rates is the last thing we want.
To add to your risks, we have seen some ?volatility? in the political theatre too. Any activity from the Left wing, in terms of withdrawal of support owing to Indo-US nuke deal, will lead to political instability as well as stalling of the reform process for some time.
This will have its own costs. Also, the elections in Gujarat are to be carefully monitored. Any verdict against the current government can make the ruling Congress-led government to call for mid-term elections. This may add to the uncertainty which the markets hate most.
Summing up
It is high time now that we turn keen watchers of various events, both at home and overseas. The rules of the game for sure are changing. The only worrisome factor is: how many variables to watch out for? It is the right time for you to train your eyes at the small parts and then to step back for a look at the broad picture.
To conclude, let?s go back to Gordon Gekko, ?It?s not a question of enough, pal. It?s a zero sum game, somebody wins, somebody loses. Money itself isn?t lost or made, it?s simply transferred from one perception to another.?
