Note on the market fall – February 2016

The Indian stock markets fell continuously for almost the whole of last week and there is now anxiety all around.  It is natural to feel little jittery on account of this fall as an investor.  There are number of reasons which were attributed to the fall and key among them are:

  • slowdown in the Chinese economy
  • threat of deflation in developed markets
  • falling crude oil prices
  • poor corporate results in India
  • high NPAs reported by Indian Banks and
  • the possibility of lower growth in the Indian economy

Let’s take this opportunity to do a check on how things have shaped up in the Indian context.

  1. Our macroeconomic parameters like Fiscal deficit, CAD are lower than what it was couple of years ago. The Government has retained majority of the gains on oil price fall in the form of higher taxes which will help to spend on infrastructure (positive)
  2. The oil prices have fallen massively which is largely beneficial for India. At the same time, it is creating troubles for oil dependent economies which will put more pressure on remittances and investments (neutral)
  3. The Govt is spending or budgeted to spend massive amounts in infrastructure growth. This is expected to trigger a wave of economic activity and provide the much needed push towards economic activity (positive)
  4. The bad assets problem in this Indian banking industry is being acknowledged and necessary actions are taken to rectify the system once for all.  There is also talk of banking reforms which will only lead to further strengthening the banking system (positive)
  5. The Govt is taking steps to bring in additional jobs through Make in India, Skill India and Ease of doing business, which can bring in higher foreign direct investment in to India (positive)

To put it simply, the Government is doing its mite to propel the economy. But the current sell off what we see is not due to domestic factors but more to do with the global situation.  Foreign Institutional Investors (FIIs) are selling to meet their redemption needs.  As long term investors, we should take advantage of this situation and start investing in Indian equities.

As long term investors, we all know that markets are slave to corporate earnings.  If the earnings grow, markets will continue to grow.  But the corporate earnings growth has slowed down at a broad level and it is getting reflected in the subdued sentiments in the stock markets.  We expect the earnings to pick up in the next couple of quarters, thanks to low base effect.

The logical question is when the correction in the Indian market will stop. The honest answer is not known to anybody. Only in hindsight, we may be able to tell that we hit the bottom on a particular day.   The markets may continue to remain volatile in the near term in tune with the latest global developments.

We are getting a good opportunity to buy for the long term.  After the fall, the NIFTY Price Earnings multiple has fallen below 19 times, making it attractive for the long term investors.  With the expected earning pick up in Quarter 3 and 4 of this calendar year.

  • As most of you are investors through the Monthly Systematic Investment Plans (SIPs), you should continue with your SIPs as you are getting the units at a good discount.
  • If you have surplus cash and which you don’t need for the next 5 years, then increase your allocation to equities in a systematic manner.
  • If not, just stay invested and you will not regret.

Please remember that you have adequate liquidity and maintain the asset allocation you are comfortable with.

I want to end with the famous quote of Warren Buffet, which is apt for this situation.

“Buy when others are fearful”.

Please feel free to reach out to me if you need more information.

 

Equity as an asset class – Part I

At a time when the Indian equity markets are trading near their all-time highs, the retail investor participation in the equity markets has fallen drastically over the past decade. Over the same decade, retail investments in real estate, gold and fixed deposits are nearing all-time highs. In such a scenario does equity have a place in the retail investor’s portfolio? What has been the experience of different retail investors over the past decade and what should they be doing now? Let us look at the experience three individuals have had over the past decade and what they are planning going ahead.

Ajay, Ram and Bharat all completed their education at a prestigious Institution in 2003 and have been working with leading multinational firms over the past ten years. As they have grown in their professional careers, they have invested their surplus money in different ways. They have all purchased gold jewelry in their family and they are very happy with the financial returns this has provided.  The three friends caught up last week for dinner. As they were discussing their financial status it emerged that they were all worried!!

Ajay – the safety seeker

Ajay went by the advice of his father and has invested in“safe” bank deposits and LIC Insurance products. His investments are giving 5-6% after tax returns. He had invested in some insurance products early in his career. When he needed money urgently and redeemed them, he found that they have very heavy upfront charges. To get high returns neighbor has advised him to invest in equity via a portfolio management scheme (PMS). But he has to find Rs 25 Lakhs for this which will mean liquidating his existing deposits and investing the money one time.

Ram – the Real Estate guy

Ram brought a piece of land in 2005. He was very happy with the returns he got and has put all his money in land and in two apartments.  While Ram is happy with the overall returns from real estate investments (18% per year), he has a serious liquidity problem.  The EMI payments for his apartments, take away a big chunk of his salary. When he tried to sell a piece of land, the recent slump in the real estate market has meant that he is not able to find ready buyers.  He can sell his other flat but he faces a big capital gains tax bill. He gets SMS’es with short term trading tips on stocks to buy and is wondering if he should invest as they promise very high returns. He is happy with “even” 25% returns per year.

Bharat – the Equity investor

Bharat’s neighbor has been a savvy investor in equity markets from the 1980’s. He is a mutual fund distributor and through him Bharat has invested his money in many mutual fund NFO’s as well as existing mutual funds. He holds 30 mutual funds and his returns are around 15%. He follows the TV channels daily and they are full of negative news. He did invest a lot of money in 2007/08 but then as the markets went down in 2008 he stopped investing. Now that the market has touched 20,000 again, he is keen to get back in the market. But he keeps reading in the newspapers about how “dangerous” equity markets are for investors. Is he taking too much risk? Should he sell his equity holdings and invest elsewhere?

While the three of them were debating about the best way ahead, who should they see but their college senior Hari!! Hari had always been a smart investor who had brought stocks and made money even while he was in college. Hari joined their table and they described their current dilemmas to him asking for advice on equity. Is equity good or bad? Will Indian equity do well or will be all “gloom and doom”? Should they invest in equity or not? If yes, then how should they invest and for what duration?

Watch this space for more!

Equity as an asset class

Happy New Year 2014!!

There is always a doubt in the minds of the ordinary investors if equity is an asset class she should invest or not.  Should she be happy with investing in time tested avenues like Fixed Deposits, Provident Fund accounts, Gold and Real Estate or is there a compelling need to look at equities to build wealth.  We are going to discuss the various asset classes and going to compare that with equities over long periods of time to help investors decide.

We are going to chronicle this in the form of a story with 4 characters spread over three posts.

Hope you enjoy reading this and wishing you happy investing!!!