The 9 safest investments for you

It might seem ridiculous to talk about safe investments and sound returns at a time when the equity markets are down 34 per cent + since last year and a tumbling real estate market is giving most of us sleepless nights.

One thing that the glum developments of the last 18 months have taught us is that when things go wrong, it's time to go back to the basics. When everything around us is crashing, the only comfort is in the simple and staid; like listening to an old song, or eating your mother's cooking.

For our money lives, this new reality of volatile markets indicates the need to go back to old options and invest in products that our parents relied on, the ones we turned our noses up at as too cumbersome, or even too boring.

These options, debt products with fixed returns mostly sold through post offices, are the safest possible as the government guarantees them.

Read More here

Source www.business.rediff.com 

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India’s Sensex May Rise to 15,000, Macquarie Says,

Indian stocks may extend their “impressive run,” helping the Bombay Stock Exchange Sensitive Index climb to 15,000 by June 2010, Macquarie Group Ltd. said.

The economy may “bottom out” in the second half of 2009, aided by the government’s fiscal and monetary policies, Macquarie analysts led by Seshadri Sen wrote in a report today.

Read more of the articles here:

http://www.bloomberg.com/apps/news?pid=20601091&sid=ahsyvlFT6ifA&refer=india

Source: Bloomberg.com

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Real Estate trend 2009 & DLF Westend Heights, Bangalore in Trouble

In continuation to my post  Real Estate Prices in India face slowdown 

I happened to read the below public notice in todays (May 07, 2009) Times of India Bangalore Edition, page 20. 

This is also available in their online newspaper edition called e paper( I am not able to put the link here) but go to http://epaper.timesofindia.com/Default/Client.asp?Daily=TOIBG&showST=true&login=default&Enter=true&Skin=TOINEW&GZ=T and check out for page 20. 

I dont know how true  it is that DLF tried selling the residential property in bangalore without approval as claimed in the notice, but one thing is for sure if it is right then its one of the worst things to happen to DLF and to the real estate markets. 

Real Estate Trends 2009:

Pretty sad to see the state of affairs in Real Estate companies. In fact if you read my earlier post on real estate you will find that the actual correction should have been close to 30% in various markets. I still feel there is lot of room for real estate prices to go down. The reasons remain the same. Till now lot of companies somehow managed to keep the price drops to just around 18% but things still are not looking good, funds have still not started flowing to the builders even after the rate cuts. This can lead to more price drops in most of the markets where prices had bubbled. I feel that if builders reduce more prices then cautiously buyers might come in and prices will start stabilizing. I have seen some builders in Bangalore doing so lets see how it progresses. 

I was going through the jones lang la salle research report on global market perspective available at their website www.joneslanglasalle.com. It says, in Mumabi the rentals have gone down by 25% Delhi by 18%. Its not only the residential prices its also comercial which is getting hit now. I quote them 'The decline in Asia Pacific property fundamentals is likely to continue during 2009, with office rentals expected to fall between 20 percent and 40 percent'. So its not only property price its also rental which is in trouble.

Just an opinion. 

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Details of New Pension Plan 2009 (NPS) of Govt of India, PFRDA

The New Pension Scheme (NPS) has been launched on ‘Labour Day’ on Friday for all the citizens.

This followed the confirmation by the National Interim Pension R

egulator of the scheduled launch of the Mega Pension Plan from Friday. This scheme will be for for employees of private sector, self employed and extended it to everyone in the country. The Pension Fund Regulatory Development Authority (PFRDA) has decided to bring in some changes in the new pension scheme with effect from May 1, 2009.

 

The new pension scheme(NPS) will allow the fund investment of nearly 50% in the high risk stock markets. Six major fund managers were shortlisted for the new pension scheme in the month of February. They include Reliance Capital,ICICI Prudential Life Insurance,State Bank of India,Kotak Mahindra Bank,UTI,IDFC. An expert panel was formed under the guidance of HDFC chairman Deepak Parekh to look into the matters of new pension scheme.

The PFRDA has made a strict limit of investment of only 50% in the stock markets of the pension funds. Even the default choice where the persons do not take any call on the percentage of their funds to go into the stock markets will have a cap of maximum 50%. The board has said that the cap would be reviewed a year later and appropriate decision would be taken in this regard.

Some Important points of New Pension Scheme (NPS)

• There will be two different accounts

1. Tier 1- Pension A/c: This a/c will be non withdraw able & one can contribute their  savings. Its available from May 1^st 2009.
2.  Tier 2- Savings A/c: This will be a voluntary savings facility & one will be able to withdraw from this account anytime. Its launch date will be notified by PFRDA shortly.
   

• NPS accounts to be opened by authorized branches of several providers called points of presence.
• Registration forms and the process to receive the welcome KIT with Permanent Retirement account Number (PRAN).
• PRAN will remain same throughout the life of the individual.
• The percentage of money to be invested into equity will depend on the individual and will not exceed 50% of the total corpus.
• One can choose the fund manager to handle the NPS.
• In case one doesn’t choose it will go on Auto Choice Option.
• In case one doesn’t choose the allocation then Auto allocation of 50% into equity applies.
• Usual tax benefit given to pension plan applies to NPS too.
• Age grop allowed is 18-55 years.
• First contribution has to be made when one applies the first time to NPS.

1. Min amount per contribution is Rs 500.
   
2. Min amount per year Rs 6000.
   
3. Min number of contributions per year is 4.
   

• NAV will be declared on a regular basis.
• The PRAN Account will be closed if the citizenship of the individual changes.

When can one get the money out?

• At any point in time before 60 years.

1. Here you would be required to invest at least 80% of the pension wealth to purchase a life annuity from IRDA – regulated life insurance company. Rest 20% of the pension wealth may be withdrawn as lump sum.

• On attaining the age of 60 years & up to  70 years:

1. You may choose to purchase an annuity from any IRDA regulated life insurance company for a minimum amount of 40 % or greater. The remaining pension wealth can either be withdrawn as lump sum on attaining the age of 60 or in a phased manner, between age 60 and 70.

• Death due to any cause:

1. In such an unfortunate event, option will be available to the nominee to receive 100% of the NPS wealth as lump sum.

What are the charges one has to pay for the NPS?

Following are the point of presence outlets: (POP)

Allahabad Bank, Axis Bank, Central Bank Of India, Citibank, CAMS, ICICI Bank, IDBI Bank, IL&FS, KOtak Mahindra, LIC, Oriental Bank of Commerce, Reliance Capital, State bank of Bikaner & Jaipur, SBH, SBI, State Bank of Indore, SBM, SBP, SBT, The South Indian Bank, UBI, UTI Asset Management Company Ltd.

 

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RBI cuts rates again on April 21st 2009, looking to fuel growth: Policy Highlights & Impacts.

The Reserve Bank of India (RBI) cut its key lending rate for the sixth time in 7 months on Tuesday and pushed commercial banks to follow suit to bolster growth which has taken a bigger-than expected hit from the global downturn.

Some Important Highlights

• Repo rate cut by 25 bps to 4.75%.
  
• Reverse repo rate cut by 25 bps to 3.25%.
• Bank rate and CRR (Cash Reserve Ratio) remains at 6% and 5% respectively.
• Banks asked to review BPLR system & make credit pricing more transparent 
• Payment of interest on savings bank account on a daily product basis, wef April 1, 2010.
• Settlement of OTC trade on corporate bonds
• Buy-back of FCCBs (Foreign Currency Convertible Bonds) out of internal accruals, subject to certain discounts, upto USD 100 mln permitted to corporates.
• Loan against NRI deposit increased from INR 20 lac to INR 1-crore .
• Interest rate futures to be launched shortly for 10-year paper.
• STRIPS (separate trading for registered interest and principal of securities) to be launched this year 
• Credit rating agencies to be kept under surveillance.

Some important Impacts.

• Deposit rates of banks will go down.
• Lending rates on all the loans including new and existing loans will go down.
• NRI,s can borrow more, from earlier INR 20 lacs to now INR 1 crore against FCNR or NRE deposit.
• Money kept in Savings bank a/c will give more interest. So from present around 2.5% to 2.75% it might go upto 3.25%-3.5%
• Banks & bond houses can cover some of the risks arising out of a rise in interest rates with the help of interest rate futures.
• Liquidity in the markets will increase due to STRIPS. STRIPS is like splitting the interest element on a bond you are holding and selling it down.  This will help in the stock market upturn.

General View:

The Reserve Bank of India expects economic growth, which slowed to a six-year low of 5.3% in the December quarter, to pick up to as much as 6 percent over the next year.

The yield on India’s benchmark 10-year bonds fell three basis points to 6.15%  today & I think it might fall to 6 % before this month end. The impact will be on the benchmark notes which are already rallying and it might go up more, as falling borrowing costs and rising cash at banks boost demand for debt.

To extra boost the economy the RBI might buy back the MSS bonds issued last year to drain out excess liquidity from the market. The only concern which we need to understand is that the monetary easing done in India by our central bank has been in line with our monetary policy and nothing extra ordinary seems to have been done like central banks in other continents. We can call it the conservative stand of our central bank. 

Investment Option:

A staggered investment option to equity with a 1-2 year of staggering preferably via mutual funds will be a decent option to enter Equity markets and investing into Income fund still shows some upside above fixed deposit of banks.

Keep investing…

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Investment Strategy May 2009: Are we out of recession? Is financial planning necessary or investing blindly to Real Estate,MF,PMS,Equity make sense

Election time has come and investors are today clueless whether to enter or stay away from investing into any asset class. In fact this time unlike analyst expectations, I feel either the Congress or the BJP will lead formation of the government with their own respective coalitions but it’s ideal to wait till declaration of results to take any action on direct equity front. Other asset classes / investment vehicles can though be looked at.

Since last two weeks Indian market has seen a rally of sort. The Indian benchmark index SENSEX, climbed 38 percent since falling to its lowest level this year on March 9.

The present rally might not be very much sustainable and there can be a downturn in the short term. I feel the markets have moved up from around 8500 level to 11k levels very fast without much change in the fundamentals. This probably happened because of positive sentiments globally that much pain is over and the return of the risk appetite to emerging markets. This can also be attributed to the fact that there might be some new carry trades emerging from developed economies due to low interest on borrowings abroad. The market also is expecting positive corporate results via AS-11 breather. Under AS 11, foreign exchange gains or losses on borrowings for fixed assets have to be charged to the profit and loss account. This would impact the net profit that companies announce every quarter.

Once the elections are over markets will take cues from the policies of the new government and global markets. We will have to wait for understanding the new policies but globally things might not be so great for SENSEX to stay close at 11500 levels in the short term. But it seems to be highly likely that markets might not see the earlier bottoms.

Though nobody can predict the market accurately but probability model based on some facts and figures can show the probable way to make money with controlled risk. If we try & understand where the market can go say in the next 18-24 months, then there are few things we need to look at:

1)   The valuation: The present market valuation looks very attractive. When else can you buy stocks at such cheap prices?

2)   Fundamentals: With enough money in the markets and with near zero (WPI) inflation, with room for more cuts, with restart of funding to corporate from banks, GDP growth around 6% (expected) and probably decent monsoon, things seems to be good for the future.

3)   Global Economic Scenario: With the home data showing improvements in the US coupled with companies who have received the TARP fund showing signs of repaying & corporate feeling less liquidity crunch along with emerging economies like China coming up with a above average economic results we can say that global economy will be close to the bottom if not above the bottom.

4)   The Market Cycle: If we look at the market cycles in India compared to any of the previous cycles, this downfall we have gown down the most to around -56% which could be the bottom. (Refer the graph below). Every downfall has a great rebound and I feel this time it will be greater than earlier rebounds but yeah it will take some time (18-24 months at least)

Past Performance may or may not be sustained in future. The above calculation depicts performance of BSE Sensex over a period of time and shall not be construed to be indicative of scheme performance in any manner. Data Source: www.bseindia.com; MFI Explorer, PRU ICICI Mutual fund,

Investment Strategy:

As I always say, every market (Equity, Debt, Real Estate, Gold, Global etc) at any level, has numerous opportunity which can be tapped if planned wisely.

A plan (preferably made by experts) based on your need/ goals, time horizon, risk appetite, cash flow, analyzing existing investments etc is the best way to be in investments than buying into any fund just because some relationship manager/ wealth manager/ investment counselor probably from a big branded company telling that x, y, z product/funds will do well in the future.

When you make the plan understanding the short, mid and long term options make sense. Just my view that on a short to midterm liquid plus schemes (check out the name changes) make sense and for say a 1 year tenure Income funds still look better.

Next 18 months is very crucial for the markets and we can expect to see lot of volatility in the market. Equity investments with a proper staggering of at least 18 month will be a wonderful idea. Pure term plans (without much fancy like Birla dream plan) will de risk the loss due to unforeseen events. A small personal medical insurance say of around Rs 2-3 lacs) apart from the company one will make sense in case of any unforeseen medical event during changing companies or in probation period when joining a new company or when going out of job for few months.  

Keep investing….

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Global recession will not stop India’s long term growth though caution remains in the short term: Investment strategy, views & concerns.

First of all I would like to thank you all who liked my earlier post on real estate trends (Real estate prices in India face slowdown ) It’s true that most of the things captured in that blog post five months back has either happened or is happening.

Also check my July 2007 blog post Market meltdown on US concerns and the cautions mentioned to all the investors about the upcoming market mayhem.

Hope you would like the below blog post too.

After a small break I thought of adding a blog post as I felt this is the time when we should understand what’s happening with the markets & what should be our investment strategy at this time.

The actual market mayhem started with the collapse of one of the US banks in Aug-Sep 2008. This collapse brought in fear in lending between institutions and bank. The low lending (at a higher rate) or say no lending at all brought in the credit crisis. The credit crisis coupled with Sub-Prime losses triggered closures of various institutions and corporate losses the world over.

Today we have reached a stage where we have lost the trust in the US belief of the free market economy. The belief that once the market moves away from the mean comes back to its original form if left alone has to be rethought. There is now a consensus that financial markets should not be left alone instead regulated to some extent. It’s the right thing to do as over regulation might kill growth and under regulation will bring in unregulated financial engineered products which might have a bad impact on the market. (The present crisis is the latest example)

I truly agree with George Soros who in one of the interviews said, every bubble has two parts one is real trends and the other is a misconception about the trend. Real trend is credit expansion with use of leverage and the misconception has been market fundamentalism. Misconception is that the market correct back to the mean always. This misconception occasionally brings in financial crisis.

The one thing we should always remember when we are in equity markets is that the market goes to extremes and creates bubbles. It means when the market is trading at very higher valuations or at very lower valuations is when bubbles are created.

But does that mean that the bottom in the market too is a bubble?? Probably yes, probably it should be called over contraction as once the trust factor comes back to the market it will start zooming from here.

Today Indian index SENSEX is trading close to  9 times of the next year forward earnings which few months back was at around 21 times. Aren’t the valuations today too cheap, too contracted??

The only thing that is stopping investors today from investing at this kind of cheap valuations is the global factors. The day we see bit stabilization in the global markets is when our markets will start their ascent journey, and it will take some time probably say a year more from here.

Advantage India:

The Nov 08 Bloomberg data of BRIC economies index performance for the calendar year 08 shows the following

MICEX of Russia down 67.64%, Shanghai Composite of China down 62.25%, Sensex of India down 53.74% & Bovespa of Brazil down 46.03%.

India is one of those few economies of the world which didn’t had substantial losses (till now)  in the subprime crisis, but still our markets came down like a pack of cards.

Indian market is mainly affected by sentiments also called the misconceptions which drive the sentiments. I spoke to some of the analyst and their blunt reaction as usual was we are affected due to the recession affecting the world economy as when there is recession the world over there will be less consumption of various products and services which indirectly will affect India’s trade and markets crash.

I personally don’t think the above analysis make that much sense because trade as % of India’s GDP is around 33% which also include oil (close to 7%). So if I remove oil from our trade then we will be left with around 26% of GDP as trade. Now let’s say that around 40% (on the higher side) of this 26% of trade is affected due to recession still our GDP should be above 5.5% which definitely is not a bad GDP as no other economy other than say China will even be closer to it.

Today lot of Indian companies are shifting their focus from US & European markets to markets like  China and also local Indian markets so that their profitability is not majorly affected.  But yeah with global slowdown we in India might see some job/salary/incentive cuts which might lead to less consumption, though this might not be on the higher side unlike economies in the west.

Second point is the inflow and outflow of money. Our markets had moved up all the way to 21K level on Sensex with lot of money which flowed into our economy either by FII, PE or as FDI.  In 2008 the total foreign flow into the country stood close to $ 110 B which will be around 8.5% of GDP. Due to the global meltdown India has witnessed lot of outflows which too was one of the main factors for the market turbulence. The money which went out was mainly due to the unwinding of the leveraged positions and to meet the capital requirements in each of the fII’s home business. Today we don’t have that much of unwinding left and governments world over are funding companies in trouble. There are also the long term players in our market like the pension funds who are still invested in India. Going forward we should also remember that when global market sentiments stabilize a bit, India will be one of the few economies which will attract a big chunk of the global investor’s money. India at that time, compared to the best economies in the world will have one of the highest GDP growths.

Third factor could be the Indian inflation as it is likely to come down to close to 6% by next year mid this will make sure that interest rates too will come down quickly which will provide the much needed liquidity to our markets and it might also act as the fuel for market upturn.

Disadvantage India: Some points

The global slowdown might lead to a series of job cuts across sectors, though the numbers might not be substantial. India need to look into ways to reduce job cuts.

Unlike China India is running a deficit close to 6.6% of its GDP so ideally the decisions to feed the economy with extraordinary stimulus package might not happen.

India’s political outlook doesn’t look too great. How beneficial a coalition govt. can be and how fast decisions can be taken by such a govt is anybody’s guess.

India is too much depended on foreign money especially by companies who borrow abroad.

Apart from this the long term India story still remains.

My views for investment remains the same as June that this is the time when we need to review our portfolios and weed out those scrip’s and funds which might not participate in the upcoming market upturn like infrastructure, real estate etc. This is also the time to rethink income funds as an investment vehicle apart from equity investments which should be invested via a proper staggered route or as STPs on mutual funds.

 Before ending, I would also like to add that the above stated points are just my point of view and any review/rebalancing /investing should be done with proper care.

You can send me your views on my email id sureshkaimal@gmail.com . 

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Real estate prices in India face slowdown

Real estate price in India is stabilizing and is facing steady slowdown especially in the metros. I have taken Bangalore as an example in this blog but other places too are affected by similar concerns.

In Bangalore the real estate price is going crazy, though none of the real estate agencies would like to agree to this fact.

Property prices moves due to the basic principle of Demand & Supply

When demand is high & supply low prices will go up

When demand is low & supply is high prices will come down

For example let’s assume that somebody has bought a property for Rs X and he is trying to sell the property (say after a year), there can be three options, assumption being that the owner is in need of money and cannot wait for more than 3 months to sell the property.

• When the property prices are zooming everywhere> Here the owner will try to add as much premium to the property as possible, wait for three months and sell off in the last month at the highest bid ( RsX + RsY)
• When the property prizes have stabilized > Here the owner will not be able to sell the property at a premium due to market stabilization & since he might not want to sell at a loss, he will try to get at least the same amount he bought the property for (Rs X = RsY
• When the property prices are going down> Here the owner will try to sell the property at the least profit or at the least loss. (RsX-RsY)

There was a news in one of the leading news papers last week that there are close to one hundred thousand completed flats without occupancy and another hundred thousand will be available for occupation by the end of July. But are there enough buyers in the market compared to the supply? The demand it seems is only for fifty thousand units.

Bangalore seems to be in the midst of low demand & high supply. This can be attributed to the facts that due to the sudden growth of Bangalore, in the last few years, lot of builders have jumped in to catch the opportunity of building residential apartments thinking there will be lot of employment and increase in salaries & hence demand for housing. Last few years were great for Bangalore as IT was doing well and other industries like banking & retail were expanding.

Today due to the economic cycle downturn the jobs are being cut and recruitments are put on freeze, salaries are stabilized and bonuses reduced, not only in IT but in other industries too. The impact of this is felt in the local property market.

Stock market downfall too has added more trouble to the real estate market as it is reducing the purchasing power. Indias sensitive index has shed 30 percent this year. Real estate stocks had a major hand in leading the sensex to the worst six-month performance in at least three decades, with the Bombay Stock Exchange Realty Index slumping 59 percent this year.

Non resident Indians (NRI) were a major segment who used to invest into property either as investment or as a place to stay when they return to India. Today for investment purpose NRI's are not looking at India as in foreign markets, the property prices have gone down drastically due to the sub prime & credit crisis and those markets look relatively cheaper with a lower price to earnings ratio compared to India.

The potential to make higher return lies there now. This ideally means that money flow into India for buying property might come down too. Loan rates of various banks too affect the demand for the property. In India loan rates are controlled indirectly by the government. Today we are sitting on a WPI inflation of close to 11.3 %. If the government here has to control this inflation they have to suck liquidity from the markets with their favorite weapons like CRR, repo rate, reverse repo etc. The loan rates move depending on the movement of these rates. Today due to the high inflation figure, loan rates might go up and lot of people will opt out from buying a property due to high EMI's. This will again lead to a decrease in demand for housing.

Some of the real estate research agencies are of the view that there seems to be a possibility of further downside within six months and it makes sense to wait & watch as of now.

Whatever the condition of the economy, one thing we should not forget is in the long term property (land) is a great investment as it is the only asset class which cannot be produced. Though there might be a 18-20% correction across in the short term ( say 6-8 months) due to the factors mentioned above ,a wait, watch and a definite buy make sense for the long term.

Some factors which inspired me to think why property prices might correct:

• Smaller developers offering huge price discounts.
• Cost of secondary sale property coming down by more than 10 %.
• Sudden increase in the attractive schemes by builders to lure investors
• Builders giving huge discount on upfront payment
• Rising inflation and interest rate.
• News of demand supply mismatch especially in Bangalore.

Just a point of view

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Global and Local Uncertainty – Lets keep the faith

In this blog post I would like to share the views of one of the investment banks on the present market scenario. After almost three years of bull run in Indian markets we have entered a pocket of introspection. Key stock indices now trade along with most global markets, at levels that last prevailed in September ’07, before the US Fed commenced its rate easing cycle. Overall market capitalization is down by 27%, in calendar ’08 and stands at levels last seen in September ’07.
Key factors affecting Indian markets can be classified as

Global environment – uncertainty continues to unfold
The unfolding economic malaise in the US has been well articulated in various fora with the principal concerns surrounding the likelihood and the depth of an economic recession, the stagflationary environment seeming to emerge there and the ability of policy makers to engineer a smooth and swift recovery in such an environment. The sharp fall in the USD over the last few days against most major currencies – the EUR trades at its life-time high, while the JPY is at a 12-year high - seems to betray the market’s nervousness on the US economy’s health over the near term.

Commodities rally as hedge against the USD
The weakness in the USD has likely led to large-scale unwinding of JPY carry-trades, even as financial investors seem to be reallocating portfolios in favour of commodities, partially as a hedge against the greenback’s weakness. Thus, crude oil prices have risen sharply to all-time highs in the recent past despite projections of easing demand in the US, the largest consumer. The shift away from USD is seen by the fact that although commodities have rallied in USD terms, their price movements have been vastly subdued in EUR terms, ever since the US Fed cut rates in an emergency move in late January.

US recession
Increasingly, the debate has shifted from speculation over the possibility of a recession (in the US) to, predicting the extent of such an imminent eventuality. A spate of adverse incoming economic data pertaining to employment, consumer confidence and production have led various analysts to project two successive quarters of degrowth, which may likely be followed by a recovery in the second half of the calendar year, aided primarily by the spate of rate cuts expected from the US Fed and the tax rebate package already extended by the US Government. The IMF projects global growth as a result to slow from an estimated 4.9% in ’07 to 4.1% in ’08.

So how sensitive is India to the current global turmoil?
The confidence in emerging market economies’ ability to forge ahead in the backdrop of a US recession emerges from the insular nature of many such countries and the domestic strengths they enjoy. India figures prominently with its strong domestically driven growth pattern.

1. Despite integrating substantially with the world in recent years, India’s trade/GDP ratio remains at c32-33%, with exports to the US constituting a miniscule 2% of our GDP.
2. Various research agencies and the IMF have estimated that, every 1% change in US GDP, would impact India’s GDP by c0.2%.
3. A near doubling in investment/ infrastructure spends over the next few years to c8-9% of GDP would provide strong growth drivers for the economy that would percolate across a whole host of industries.
4. Aided by among the strongest income growth globally, lower taxes (both indirect and direct taxes were cut in the recent Budget) and potentially conducive monetary environment later in the year, domestic consumption demand is expected to pick up substantially over the next few years.
5. On the back of the above domestically led growth, corporate India is widely expected to grow its profits by c18-20% over the next two-years. This growth comes off strong balance sheets with debt levels lower than those seen at the beginning of the decade.
   
   However, while the medium/ long-term picture remains unchanged, over the short-term, the principle sources of permeation seem to be through the financial markets, where rising credit spreads and unexpected currency movements may create short-term turbulence for corporate India. Higher risk aversion in the near-term could also dampen companies’ ability to raise finance to fund their growth plans in the short-term.
   Most of the above may well be transitory in nature, given the longer-term robust outlook for India. Besides, domestic savings that stand at c34% of GDP and rising, would likely be able to support the investment requirements of the economy.

What is the near-term economic situation?
The Indian economy is undergoing an engineered moderation over the last four quarters and could now be well placed to regain its higher growth trajectory aided by fiscal and potential monetary impetus. Key factors here and the debate surrounding them include:

1. The Union budget has cut excise duty and sales tax, even while raising the income tax slab and granting an unprecedented farm loan waiver with the objective of easing domestic inflation and providing impetus to consumption demand.
   » These measures would not only raise income levels across the economy, but also make goods more affordable – both positive for driving consumption.
2. Rapidly falling US interest rates, a recent divergent trend of a weakening INR and conducive deposit and credit growth could help the RBI consider a benign monetary environment in the coming quarters. System rates have slid since January with bank lending and borrowing rates easing by c25-75 bp supported by domestic liquidity.
   
   » The flipside to this is however from stubbornly high domestic inflation, that faces the further risk of rising crude and commodity prices.
   » A fundamentally weak USD and broadbased currency appreciation across similar nations, could however raise calls for renewed appreciation in the INR, that would reign in inflation.
   
   Despite mixed signals, markets seem to be betting on rate cuts by the RBI in the latter half of ’08, mostly in an effort to buoy growth.
   Given the confluence of domestic (inflation, growth moderation) and international factors (oil prices, US recession, capital flows), policy making may well see some tightrope walking, while providing critically needed direction to markets over the near term.

Outlook
The ensuing global uncertainty may well cause markets to remain fairly volatile and gyrate to evolving international developments, while investors would closely watch its impact on Indian companies in the forthcoming quarterly financial results season. Initial indications hint at some disappointments around forex losses, bond exposures and easing order flows from the US.
Consensus estimates put earnings growth for the Sensex companies in FY09 at c20%, implying a P/E multiple of c14x at current index levels. While a consideration of the growth scenario over the next two-years at current valuations, demand investor attention, near term sentiment on global markets have raised risk aversion sharply. Even as the debate rages on the outlook for the US and thus, its key trade partners, the growth outlook for India remains largely intact. It is this backdrop that long-term investors would necessarily need to focus upon, while viewing domestic equity markets amid volatile periods.
Thus, while near-term volatility is virtually a given factor, the opportunity to invest at compelling valuation levels over a 2-3 year investment horizon may help in contributing to overall portfolio performance. With the ensuing uncertain environment, we believe large-cap stocks/funds may provide sound opportunities over the near term, while a carefully tailored portfolio of mid-cap stocks/funds would benefit over a 3-year horizon. Investors should use a tranched approach to investing so as to derive the most of the volatility in markets.

So as I always say Lets Invest...

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Emerging markets especially India look attractive at this level though caution remains

In August 2007 I had come up with an article titled “I guess it’s just the beginning for the sub prime”, this was also the time we had asked all our clients to slowly come out of equity markets in a staggered way. This was the time that we felt that SENSEX was trading at a 2009 PE multiple of close to 28 times and there has to be a correction for market to remain healthy in the long term. We were just waiting for a spark in the market and we found one in the sub Prime and credit crises mess in US markets.
In December we had come up with an article titled “Emerging markets will power the world economy in 2008 so lets invest” which truly showed the power and our belief in the emerging markets. We feel that however bad the recession in the US, Em’s will perform due to the strong fundamentals and developing internal growth. Yes the short-term volatility due to lot of bad news coming from the US will make the markets range bound & in short term we also expect SENSEX to be trading between 13.5 to 14K.

The future profits after the credit crises and the sub prime mess lies in emerging markets of Brazil, Russia, India & China and all the investors should diversify their portfolio towards emerging economies. Take for example India

Though India is said to be insulated, ICICI bank has come up with $264 M as notional mark to market loss and the latest is SBI which today had informed that they have a notional loss of $250 M (as per Reuters). Since sentiments drive our markets, there might be a negative reaction to this news when markets open next.

India today has more than 1bn residents and has become the world’s fourth-largest economy in the world behind the US, Japan and China. India’s foreign exchange reserves are the sixth largest in the world with $ 140 billion and its current account is in surplus for the last three years. Indian earnings are growing at 20% and half of the population is under 25. Over the last 3 years the number of shopping malls has increased from 25 to nearly 200 and the government has pledged nearly half a trillion for infrastructure development over 10 years

Whatever the sentiments in the market lets believe in the power & potential of Em’s and specially India. On a SENSEX of 15 k the valuations look cheap with corporate earnings close to 20 % and the fundamentals remaining strong. The sub prime and credit crises will make sure that our markets will be range bound for at least six more months and then there might be a real take off though it will be difficult for our markets to cross the earlier highs. Please wait for details on other BRIC economies in my next blog till that time

Lets Invest...But this time in a more cautious and properly staggered way.

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Where are the markets headed?? Will sensex cross the earlier highs??

This is a question lot of investors have in their mind after the fall we had seen in Indian markets. Sensex itself has fallen from 21000 level to now around 17500.

In India, we will only see 22-24% earnings growth in FY08 and 15-16% in FY09.
The first half of the year will be pretty volatile and the market might even see the lows of 14k on the sensex. Second half should be good and I expect the market to be rage bound and it might touch the highs of 21 K. What we should observe here is that 21 K is the earlier high and market might not move beyond that.
All markets world wide had a great rally last 1-2yrs but if we go deep into details on each market we would understand the reality.For example, S& P had gone down by 20%, but it hadn’t gone up all that much,whereas the emerging markets are essentially way overboard and way over their long-term trend lines. So I think that in many cases, some of the emerging markets could still drop about 30-40% from the present levels.

In precious metals, we had a very strong bull market and an even stronger one in industrial commodities, Gold as a commodity seems to have peaked up and taking into consideration the situation in US economy I feel Gold should see more highs and is a good commodity to hold for the long term.
On the economy front we should understand that emerging economies especially in Asia has become less dependent on the US than it used to be in terms of its exports. Today if there is a recession in the United States, the drive towards outsourcing and cost cutting could actually be increased and emerging economies will get the benefit.
US hold around 30% of the world GDP and are the biggest consumer of goods supplied to it from around the world. Going forward we can expect a decline of around 5% in the consumption due to recession which might not affect the emerging markets exports much,
Apart from what I said above we should also understand that the internal consumption is increasing in emerging economies, take for example the first time car buyer's data. In China 84% are first time car buyers and in America it's only 1%. So the market potential in Asia in terms of consumption growth is still very high, not only in China, but also increasingly in India. May be over the next 10-15 years, Asia will become very independent from the United States.
Whatever the volatility in the markets, a strategy to stay cool and invested for 5+ years make lot of sense. I think all the investors should invest now with proper staggering for the next three months.

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Core Investment Lessons which investors should not ignore.

Need / Goal based financial planning: Investment into various investment products just for the appreciation/return given by the product or expected is not the right way to look at investing. Investors should always make a financial plan before they invest based on their needs and goals. They should understand their need, goal, risk appetite, time horizon and product details and then invest. This can only be achieved by proper financial planning.

Asset allocation: Asset allocation is the key and investors should never ignore the basic principles of it. They should always be properly invested in various asset classes depending on their risk profile and time horizon.

Proper Review and rebalance: Investors should keep a time table, ideally once in every quarter, to review the portfolio of various asset classes where they had invested. When the needs, risk profile and goal’s change due to various reasons then is the time we should go back to the portfolio made and do a proper review and rebalance.

Timing the market via MF is foolishness: MF’s work on the concept of Net Asset Value which changes daily. There is no point in observing the market till 2 in the afternoon and then taking a call to buy or sell the MF. MF’s should be considered as a means to reach the aim/goal and should be invested with a timeframe in mind or rather I would say with proper financial planning.

Regular investment is the key in a volatile market: Regular investments via Systematic Investment plans also called SIP via the mutual fund route add that extra stability to your portfolio. It’s a tool which averages out the cost of the portfolio and should be a part of the MF investment portfolio.

Direct Equity should also be an asset class in the portfolio: Lot of investors keep a view that trading in stocks doesn’t make sense to them as it requires time to buy and sell. The best portfolio as per me should also contain direct equity stocks apart from MF’s. There is absolutely no need for the investors to buy and sell. They can buy some fundamentally good stocks and should adopt a buy and hold strategy for the long term.

Avoid complexity: Investors should understand the way their money will be invested by the fund manager. Basically he should clearly understand the concept of the fund and go through the key information memorandum of the fund. As there is a saying that risk comes from not knowing where you are investing. So avoid unnecessary risk and complexity.

Be conservative in expectations: Markets are evolving day by day and the risk return graph keeps on changing so it better to be conservative and practical in the expectation of the portfolio returns.

Never be sentimental: Lot of channels and news papers will come up with their own theory of the happenings in the market. Investors should either stick to the goals and plans made or make their own research on the happenings in the market and analyze the impact. One should never sell without understanding whats actually happening in the market. It migh be an opportunity loss too.

Choose a solid Advisor: Last but not the least is to choose a solid advisor. I always recommend choosing an advisor who is independent, knowledgeable and knows what he is speaking about and preferably is not running for money or targets. You will understand this when you speak to some advisors. Always remember that your advisor can make or break your dreams so choose wisely.

Lets Invest..

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Emerging Market’s will power the world economy in 2008, so let’s not wait to invest

BRIC economies of Brazil, Russia, India & China will represent the major growth in world economy. China tops in actual returns for 2007 with the Shanghai Composite Index returning around 80% followed by Indonesian Composite Index with 52% and India’s Sensex with 45%. Concerns on valuations remain in China and some analyst expects Chinese markets to correct as the valuations seem to be very much stretched.

On the other hand in India the valuations are justified by higher earnings growth and strong fundamentals. India also looks attractive to lot of analyst as the domestic demand is increasing and their reliance on US is decreasing. Indian economy is less susceptible to the happenings in the world economy & has increased the trade among other developing nations and with Europe.

S&P believes the bull market in EM equities has further to run and the EM equities should represent a core, long-term holding in U.S. investor portfolios which will make sure that the local EM markets will grow whatever happens with the the big daddy of the world economy, US.

Analysts are contemplating that US might move into stagflation where growth stagnates and prices increase. This will make sure that lot of investor’s portfolio will be skewed towards the EM markets and money flow to these economies will increase making the EM markets and the local currencies to soar. Year-to-date through Oct. 5, $14.8 billion in new cash entered emerging-markets equity funds, vs. an inflow of $2.8 billion for all of 2004, according to EmergingPortfolio.com.

So are we still waiting for the markets to correct here in India???

I have always been of the view and have been advising my clients to take the mutual funds route to investments and be a regular investor.

A CRISIL study reveals that investments in mutual funds (MF's) have delivered higher returns, at relatively lower risk levels, in comparison to market indices across various time periods. CRISIL believes that MF investments present a rewarding proposition for retail investors to partake of the benefits of long-term investing. (Source http://www.crisil.com/index.jsp )

I believe in making a good and stable portfolio which as per me should contain a max of 8-9 Eq mutual funds with a correct mix of large, mid and small caps with a pinch of value, contra & dynamic funds added with systematic investment plans (Sip’s) to stabilize the portfolio and give that extra kick.

As I always say lets Invest…

(For opinions on portfolios send mail to sureshkaimal@gmail.com with subject opinion required)

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Its time in the market and not timing the market which decides the fate of our investments

Couple of days back I met one of the fund managers of a big asset management company and we had an in-depth talk on the basics of investing.

The basic and the most important part of investing as per the discussion is the FV formulae.

FV = PV (1+r) ^t
Where
FV is the future value
PV is the Present value
r is the rate &
t is the time.

This formulae is very powerful and it suggests that if we are investing, the FV i.e. the future value is not in our hands as we might not get what is promised, the rate of return is also not in our hands as it depends on the product which we buy.

The time (t) and the PV ie the present value or the present amount which we have to invest is in our hands as we can decide how much and how long to invest. These are the only two variables which will decide the fate of our investments. Lot of people try to time the markets by observing the markets and trying to invest when markets are at the bottom and to sell when it is at the top. What people don’t understand here is nobody in this world will ever be able to tell how low is the bottom or how high is the top in the markets.

So let’s not time the markets and instead choose some fundamentally strong products and invest regularly for a long time.

Let’s invest regularly and stay invested whatever the markets levels are. We should remember and not forget strong fundamentals of our economy which is leading us to the said growth.

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Market view for the coming week

This year we saw the first muhurat trading in the last seven years with a negative market breadth. Its more to do with the international market outlook due to the losses and write offs made by banks, financial institutions, broking and asset management companies there and the view that more such write offs are bound to happen. I had come up with an article on Sub prime in my blog in August 07 where I had a view that it’s just the beginning of the sub prime mess. (Check it out here.. I guess it’s just the beginning for the Sub prime crash & Market meltdown on US concerns)

The coming week we will find our markets in more red due to high oil prices, worries on rupee and dollar and the worry on more sub prime write off to happen in the US.
U.S. stocks are poised for more weakness next week, after a complete wash out of the hopes that technology shares might pull the market out of the sub prime mess. Concern about credit problems is spreading throughout the economy take for example what happened on Friday with IT Company Cisco Systems Inc who said that its business has seen a significant decrease in orders from banks due to the credit concerns. So its not only Banks or financial institutions but IT and other companies related to banks are in the grip of sub prime lending mess which If spreads more might not only take the US market down but emerging economies too. Take for example an Indian IT company like Infosys whose +60% business comes from US. Due to rupee appreciation they have already increased the prices for their services. Now guess what will happen if they are not able to sell in the US as banks there are totally in the credit and sub prime mess?? No points for the right answer. Let’s be underweight on IT in India for the quarter.
Though there are chances of India getting affected due to international sub prime mess, we should not forget that our fundamentals are pretty strong with expected corporate profitability of 28% for fy 08, expected GDP of 9.5%, inflation of around 4%, PE ratio for the market (sensex) to be between 20-25% (China index @ 55%) the long term outlooks seems great to be a part of.
Whatever the credit mess, we should not forget that the fundamentals for India are very strong and every fall in our market should be treated as a buying opportunity. The coming week might give us good opportunity to buy into and as I always say
Let’s Invest.

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SENSEX crosses 18300…There’s lot to expect from the current market level??

Most of the investor community is worried about the market at this level. Some say we have grown very fast, some say FII’s might pull out, some say usually at this time of the year there comes a big correction and there are some who feels the political uncertainty might cause a big correction.

But do we really have to worry about this market??

The fear in the market is not knowing where you are investing. If you know that you are investing in the world’s fastest growing economy with a GDP expectation of more than 9%, an economy which is a part of the emerging markets which is an asset class in itself and where the risk apetite of global investors is increasing. Emerging markets receive 10% of the global allocation and represents 30% of global economy and 15% of global profits. So a market like India looks attractive in the long term to lot of investors whatever the level is.

There is also lot of concern regarding Hedge fund operators in India. Investors are of the opinion that they might pull out money as for them profit is the only motive. Here we should understand that after all the sub prime mess and re-rating of various markets some of the riskiest Hedge funds have either collapsed or have changed their strategy in investing specially in emerging markets. Interest rate concern is not so prevalent in our markets since the economies inflation performance has been good RBI might not tighten the rate.

We should also understand that foreign investors are less sentimental than the domestic ones. There are lot of advantages to an economy flush with liquidity from foreign and domestic players and an appreciating currency.
So in a scenario where markets start reacting to some bad news domestic investors might sell out and foreign investors might buy. This will make sure that either market doesn’t correct with big difference or will correct and move back and trek to a new high within a short span of time.

The imp worry for India is that it is a cyclical society with a low per capita income. After the global economic cycle which has favoured the emerging markets for the last 2 years takes a cyclical turn, India goes back to stability phase. India is also considered risky in their domestic policy and reforms management. Hope to see some good and bold decisions for fast reforms in agriculture, trade and infrastructure.

Whatever the worry is it’s a good time to be in India if we have a long term horizon. Lets not think more, lets not loose the opportunity,
Lets Invest..

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Sensex above 17K.. Is it the right time to invest?

In February 2007 I had come up with an article Buy..Buy ..Buy...where I had asked lot of my clients to invest. Remember that was the time when markets were close to 12000 levels on Sensex. There was panic in the market as there was expectation that the market will go down to 8K levels soon. Most of my clients are still holding the asset class and have reaped the benefits. All my focus had been on long term investing and why we should not be worried about the market level especially when we are investing in an economy like India. Indian finance minister expects India will be growing around 10% on GDP with corporate returns to be in the range of 28% + with more appreciation in the rupee and more flow from Europe, USA & Asia. So doesn’t it makes sense to be in invested in India now? Ask any investment guru and he will say lets look long term. But what is long term???

Ideally its 3+ years.

I was telling one of my customers today that some of the hedge fund operators in Europe have made India as an asset class in itself. That’s something big for our economy as it will make sure more money flow happen to India & most of which will move into the markets, real estate or as direct investment into the companies. All the three make sure that the stock market moves up.

So isnt it a great time to be in the market. As somebody has said its not timing the market but time in the market which makes all the difference. So lets think big, lets think to remain invested; lets not try to time the market and Lets Invest.
Keep Reading.

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Do we really have to worry about the recent market fall?

Let’s try to understand what happened in our markets from an average investor’s perspective. If you ask an average investor he would say India as a market was trading at a very high premium till recently and in this kind of scenario everything is dependent on liquidity coming in. That’s right but if we try to understand the psychology of the investors we will find that domestic investors are bit pessimistic about investing at high level while the FIIs or foreign players are not. FII’s pumped in money as they became more confident in the India growth story.

Everything was going smoothly and then we heard new words like Credit concerns, Sub prime, yen carry trade, rupee appreciation, yen appreciation etc etc and guess what, though we might not know what all these words mean but still it’s a concern to us so lets not take risk, forget the growth story for some time and lets sell off.

Isn’t it what happened in our markets? Who lost?? The average investor err...average trader lost. If he was an investor he wouldn’t have sold off. My logic of telling all this as I always say is whatever the market stat lets not panic, lets stay focussed and invested.

We should understand that markets will be volatile in the short to medium term as there might be more hedge funds which might entangle itself with the subprime issue, or the credit concerns abroad or the temp govt instability but let us stay invested rather lets invest more.

Keep reading.

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