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….