Tuesday, January 12, 2010

Markets in 2010

Disclaimer: I am sharing my personal views about the economy and markets. Market may prove those wrong. I will not be responsible for your profit or loss.

Economic Conditions –
The government has provided robust support with the stimulus package. The government has spent 1, 60,000 crores. But from where this money will come? There has to be a source. Clearly, the government and monetary policy makers together will act on this and this should result in the higher interest rates or the higher taxes, or both. Also, this is the time when the stimulus package should be withdrawn. India’s economy is growing with 8-9% and we are no more in the recession. But the question arises, is this growth real or because of the stimulus package? The amount used to come out of recession and to stimulate the economy is not small. I think will clearly have some effect on the actual growth rate and GDP number. I am not sure how much effect it is but I think it should not be much but we really should not worry about it. Because the long term growth story of India is intact and surely we will recover the losing points in the near run. For me, it will be interesting to see how our economy and share markets will react after the withdrawal of the stimulus package.

Let us see what will be the effect and near term consequences of the stimulus package withdrawal on different asset classes.

2010 will be a selective picking year. And the Mantra for success will be contra themes. Right now markets are on peak. Future earnings (2011) are almost fully discounted in today’s prices. And you can look at the stock prices by any means, be it ROCE or ROE but they are not cheap. Stimulus package should be withdrawn in some days unless political leaders don’t create obstacles to save their vote banks. These illiterate leaders don’t even understand the consequences of their actions, but chalta hai. Ye hai India meri jaan. An excessive liquidity supply generally creates asset bubbles in the stock market which is the case right now. The formation of fake bubbles has been already started and only liquidity is driving the market. Fundamental valuations are way behind us now and what is going in the market is just the speculation. Also, the stock market is clearly taking for granted that the stimulus package will be there forever. And so prices are reflecting the same theory. But after the withdrawal, the market will crash and we may observe even bigger damage in the interest sensitive sectors. That will be good time to buy in equities. May be, 14000 on sensex is that position. I am personally comfortable around those levels. Also, it’s my feeling that once crashed then it will take little long to recover market as a whole and the momentum should be primarily sideways. It’s a general tendency to ignore bad things in good times and good things in bad times. So with this theory, everybody will start talking negative when market will crash. That is the best time to pickup good mid-cap stories. I believe in the domestic consumption story. So companies like Sintex Industries or Jayashree Tea are good. But most of such stocks are already near their 52 weeks highs. So please do not buy them at this point just because you are hearing these names.

The interest rates should rise and therefore avoid interest sensitive sectors like banks, autos, auto ancillaries and real estate stocks because they will tumble after stimulus package withdrawal. And after that these interest sensitive sectors will be dumped more as compared to market and these will become contra sectors. That will be the good time when market is hammering hard on these stocks. Investors can go for Dena Bank, Hero Honda, Alstom Projects.

Infosys has declared the results. Though it is quite impressive but they are muted on guidance. I think that’s because of the uncertainty in dollar rupee exchange rates. If rising rupee has any further impact on the earnings then IT sector will be dumped on the every rise of rupee. Then let it fall freely and it will also become a contra sector in few months. Go for TCS, because it is a comparatively cheap company as compared to the stock prices. A contra IT sector will surely pay in the future, because low levels of Dollar are not yet affordable for any government and also it affects exports. RBI will surely control rupee levels by Open market operations.

Also real estate companies who have significant revenue coming from Mumbai projects are also avoidable till next year. Because of shortage of water, no new projects will get a green signal for construction, so this is a loss of revenue and this will reflect in their earnings. Go for such companies who are getting revenue from leases they have given to corporate in Mumbai. Investors may buy such type of real estate stocks at the end of stimulus package impact cycle. I.e. after the withdrawal, the market will crash and after few months it will again start picking up. That is the good time to buy lease based real estate stocks or simply buy those real estate stocks that have minimum new projects in Mumbai area. That will be also the time when government will either ease down the interest rates or keep those levels intact to push up the economy without any external supply of the stimulus package.

Telecom is a good contra buying at the current moment. Look at Airtel, such a good company and proved track record. Now they are tying with Warid networks in BanglaDesh. This is a significant amount of deal. The key of success in share markets is contra investing, always and of course, patience. If you have the guts to go out and buy some good quality stocks when no one believes on the stories then it may pay you huge returns in the future. But you should have patience for that. This has been always proved. It’s a typical Warren Buffet theory. Remember last year, IT sector was dumped so badly because rupee was rising and people started believing that Dollar will not bounce back and this is a start of India shining story, we are the leaders of tomorrow, blah blah. But Dollar bounced back and so are IT stocks. So it’s totally depend on an individuals risk capacity and courage.

This is tricky. Gold rate is at all time high around 1150$ .But at the same share markets are on peak and they are about to crash. Now, past record indicates that whenever equity markets are crashed, commodities like gold & silver had shown increase in the value because these assets are considered as safe heaven for investors. These assets will at least give you protection from inflation. But when gold & silver prices are already at peak level, should you trade in it? May be no. Then what is the strategy? Well, I will say that buy gold around 1090$ levels which is a base level for it now and sell it around 1150$. If markets are crashing then just hold the gold. Don’t sell it and watch out for 1150$ levels breakout. If it crosses this level then it can surge much further from these levels. Many Exchange Traded Funds are available on NSE to trade in gold and these funds operation cost is very less and so is your transaction cost.

Crude Oil, RBI and Inflation in India -
It is also range bound from a while, and range is 80-82$. But I feel that it will cross the range and crude oil will be on much higher levels. Because it will get the strength as the Dollar value will decrease. That also means that importers in India have to pay less for the crude-oil getting imported. But as obviously fuel prices in India will not come down, that means it will benefit crude oil refiners. So, here is the tip. Wait for the market correction and buy any good quality stock like Reliance Industries or Cairn India from this space and hold it till the Dollar values are at low levels. This also triggers the signal that now you should avoid exporters stock, as they will get less bills and this will damage their earnings.
I also feel that the RBI will make use of this opportunity to provide cushion to the Indian economy from the imported flavor if inflation. The Dollar is losing its value against other currencies rather than other currencies are getting stronger. This will allow RBI to control the money supply. RBI may also sell few dollars to keep the Dollar prices down so that less money will be imported from outside of India and this may bring down the inflation in India. The inflation is around 4.3 % but the real worry is the food inflation which is at decade high levels. That is around 20%. Mr. Sharad Pawar is giving all fancy opinions about the reasons behind the high prices but I personally feel that commodity trading on the food material is responsible for keeping prices high. And our agriculture ministry has approved this trading. No wonder NCP has lot of money to spend in the elections. I don’t want to blame somebody because I don’t have any proofs but at least we can smell that something is fishy.

World Markets, China, Brazil and India -
I remember, in late 2007 everyone believed that India and Brazil are domestic consumption stories and these countries will not suffer from an American or European recession. But eventually these theories proved wrong and our markets crashed from 21,500 to 8,000. It was obvious. And we are obviously connected with the other world. We have to understand this fact and accept it. The recession in USA is forcing Indian real estate prices to go down. The world is a small village now. So, with this theory we can seek for the economic indicators those will show the path ahead. Let’s look at China. The Chinese government has started pulling interest rates in upward directions and tightening the liquidity measures. Every government has provided stimulus packages in their own country to take the economy out of recession. And these early signs from China are indicating that the cycle has reversed. And this is the time where interest rates should start going up in India also. Please take note of all these indicators. It also means that the interest on the Fixed income securities should go up. So if you are planning for a bank deposit then wait, may be better time is ahead.

In short, 2010 will give you many opportunities but you have to be selective in the asset classes. Be contrarian and courageous investor and keep cash in your hands to make use of the opportunities.

I think that’s enough for today. This is the first time I am trying to make analysis on the overall economic condition and trying to make forecasts about the future. And historically I am observing that I am good in quitting (In short loser :D) the market at the right times. I may not be good while entering but generally I sense negatives first. So this is an attempt or a wake up call to all my friends who are investing just blindly in the share markets. I hope these visions will prove right and even if they don’t, it does not matter because at least this knowledge sharing session may help some of us in understanding the world in an economic and better way :)

Saurabh Panchi
Date – 12th Jan 2010


Anonymous January 19, 2010 at 12:18 AM  

very well balanced view.
Every point is proved with good analysis.
And it is easy to understand.
(so called experts can take look at this and make comment)

Saurabh Panchi January 22, 2010 at 7:40 AM  

Thanks Sachin :)