Retail investors must stay the course as there is no structural change in India’s domestic growth expectation

Lisa Pallavi Barbora, Mint Money

source: http://www.livemint.com/Money/HQ1kj5xx0iFsbaKsR1NY3K/Understand-risks-and-stay-invested.html

In January 2015, there was euphoria all around; domestic equity markets were touching all time highs, rate cuts were expected to come through and boost the sagging economy, and, of course, it was anticipated that the momentum in reforms would pick up pace as the Narendra Modi-led government settled into its new role.

A year later, a disheartening gloom underlines everything. Domestic equity markets (large- cap indices) have corrected around 17.6% from their peak in January 2015. The 125-basis-point (bps) interest rate cut delivered by the Reserve Bank of India (RBI) in 2015 hasn’t yet translated to significantly lowering lending rates. One basis point is one-hundredth of a percentage point. Globally, the US Federal Reserve has increased rates, however, economic recovery is expected to be slow. Commodity prices worldwide have collapsed due to Chinese demand falling. And now the sharp correction in Chinese equity markets has everyone wondering what next.

The risks are well known and the current crisis in China is being compared with 2008. Time and again, price movement has shown that markets find reasons to rationalise levels if valuations run ahead of earnings. The current correction in the domestic equity markets might just be that reversion to rational levels. At such a juncture, it always helps to evaluate risks and understand what more can go wrong.

What if China worsens?

The fear is that history will repeat itself and once again it is high debt levels that will trigger a crisis. China has produced too much concrete—buildings, airports, roads, and so on. In the process, its debt as a proportion of gross domestic product (GDP) has sky rocketed. The problem is that now every incremental unit of lending is producing lesser.

At the moment, it seems things could go either way. The Chinese government’s efforts with monetary easing and other measures could effectively reduce the interest burden. But, at the same time, to stimulate demand, more leverage itself could be needed.

According to a report by Citi Research in September 2015, Global Economics View, helicopter money drops (fiscal stimulus by making more money available) and debt restructuring can prevent a recession. But these are easier said than done. While the former can have an unwarranted impact on inflation, the latter might just end up pushing the problem further down the road rather than resolving it.

If the conditions in China worsen, the worry is that its currency may get further devalued. According to a report from BMI Research in August 2015, the devaluation (of yuan) has worsened the outlook for global trade and will clearly have a negative effect on China’s competitors and those with high exposure to the country’s market. Importantly, it has increased the risks of another round of competitive devaluations in emerging markets, and will contribute to global deflationary pressures. If this happens, the Indian rupee, too, will be affected.

“The worry with the situation in China is that global manufacturing growth could slow down further. For India, the impact could be felt in the form of capital outflows if stock markets in the region correct,” said Gopal Agrawal, chief investment officer, Mirae Asset Global Investments (India) Pvt. Ltd.

So, the domestic market could feel the pinch if the crisis in China continues. However, this is not a structural issue for India, hence, the impact may not be lasting.

Fall in commodity prices

A global manufacturing slowdown has fuelled a fall in commodity prices, which prima facie works well for many segments of a growing economy as margins expand and some of that cost advantage might even get passed on to the buyer. However, a sharp fall in prices reflects a lack of demand, which, in turn, shows the absence of growth and that by itself is worrisome.

Moreover, there are many large industries that are dependent on commodity sales, and if revenues decline in these, jobs and earnings come under threat. This takes away from overall economic growth

“While commodity companies will keep producing as long as they are able to earn up to the marginal cost of production, any slowdown in manufacturing impacts job creation negatively. This can only be countered by higher government spending on infrastructure development,” said Agrawal.

The silver lining for India is the fall in crude oil prices as we are net importers. But again, a depreciating currency may somewhat dampen this benefit.

Domestic reforms

When the National Democratic Alliance government took over around a year-and-a-half ago, many changes were expected, including ushering in foreign direct investment (this has actually happened to some extent), move to goods and services tax and boost to Indian manufacturing.

However, saddled by politics and a banking sector that is struggling with high levels of non-performing assets, the government hasn’t been able to push through as many reforms as it had hoped to. While macro-economic indicators have improved, impact of any real change is yet to be reflected in corporate earnings.

“What we are looking out for is a turnaround in corporate earnings. Government capital expenditure needs to be more aggressive for this to happen. There is some pent up consumption demand in the economy, which we hope will hold out,” said Anup Maheshwari, executive vice-president and head, equities and corporate strategy, DSP BlackRock Investment Managers Pvt. Ltd.

Government spending on building infrastructure can have a multiplier effect on consumption and corporate earnings. However, the translation can take time. India needs changes that will have a lasting impact, hence, it will pay to wait rather than hurry into superficial facelifts.

Maheshwari said earnings seem to be bottoming out as there have been continuous quarters of lower profits, and the banking sector has seen some cleaning up of bad assets. As we learnt in 2015, while the direction of change can be predicted, the timing is harder to ascertain. While earnings disappointments can continue to come through, directionally, a cyclical turn is what experts are talking about.

Mint Money take

Leaving aside the global tremors that are expected to have a short lived impact on our markets, experts are talking about lower levels in benchmark indices based of rationalisation of valuations. Although not expensive at 14-15 times, earnings need to catch up.

“If we consider earnings and work with the worst case at the lower end of the earnings cycle, another 7-8% downside in markets can’t be ruled out. And that’s the level at which odds turn positive to make a decent absolute return over a 3-5-year period,” said Maheshwari.

Clearly, there is more downside in the markets but when that will come through can’t be predicted with conviction. If the news flow turns sharply negative, global or local, the downside will come through faster. If the opposite happens and for some reason there is a positive news flow, markets could even rise or stay at current levels.

Given the economic changes that are expected to come through, a situation that supports a long drawn out bear market seems unlikely. Moreover, unlike the correction in 2008, when many asset markets were in the bubble territory before correcting, in 2016, there are fewer asset bubbles (except the Chinese stock market, which is witnessing sharp daily moves).

For retail investors who are already invested, staying the course and sticking with asset allocation might cause anxiety— especially on days of sharp falls—but it is the appropriate response.

Short-term investors should be worried about further downside. Traders and short-term investors will adjust their daily, weekly and monthly positions according to the market trend, but long-term investors needn’t be perturbed by noise.

No one asset outperforms all the time, hence, one must diversify. Let the allocation be dictated by your financial objectives rather than market events.

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This is a great time for the small band of intrepid financial planners of India who have solidly worked on building a client base on the ‘right-selling’ financial planning principle over the past 10 years

by Monika Halan, 26/8/15 Mint

source: http://www.livemint.com/Money/bC53bdlawmatE1HbLnBl4L/When-the-markets-crash-let-traders-cry-Not-you.html

A big market move is accompanied by lots of excitement. Usually the excitement is of traders who are either kissing their screens or holding their heads in despair. Human beings tend to mimic the emotions of others near them—try being sober around a person who is laughing uncontrollably or try to not tear up when your friend is crying uncontrollably and see how tough it is not to react in empathy. Especially when there is a large market crash, the images on TV, the messages on social media and the newspapers all contribute to average people feeling that a big catastrophe has happened and they need to worry. And here is the strange thing: the real investors—that long-term equity investor who has a diversified portfolio of stocks and funds—simply have an average day at work. It is the punters, the market timers, the tip-seekers who get deeply influenced by the reactions of a market crash and spread the emotional contagion. Strangely, the most affected are people who have no stake or have very small sums invested.

Since the culture of long-term equity investing is still new in India, there are concerns about markets with new investors and those still to start making a financial plan. They worry—maybe this time it is different and the world economy will collapse with all my money in it; I’m safer in fixed deposits and land. What they forget is the slow slide of real value of money in a fixed deposit, which post tax and inflation, usually gives negative returns at the top tax bracket. Real estate is a messy, lumpy, black money-bearing, costly investment that, on an average, gives returns that are lower than equity. So, how bad can markets get? Let’s look at bad stock market events in the past in India. Let’s take Sensex closing rates from 3 April 1979 till 24 August 2015. We see that it has fallen by 6% in a single day 19 times, including the fall on Monday, 24 August 2015. It fell 5% in a day 40 times, and 4% 90 times. It fell 11% twice and, the worst, 13% in a single day, once in April 1992.

How does this look when we look at up-moves? Markets have gained 6% in a single day 24 times over this 36-year period, have been up 44 times by 5% in a day, and a huge 92 times been up 4% in a day. The biggest one-day move was 17% in May 2009 when markets reacted to the Left not making it to UPA-II (as an aside: little did markets know!). Markets go up and markets go down. When this happens over a short period of a day it makes news, a slow slide of 6% over six months is less scary but is equally harmful to your money. Looking at the ‘markets are up more than they are down’ data, should we conclude that this crash will quickly end and markets will bounce back quickly? Nobody knows. That’s the thing with equity investing—the time horizon has to be long enough to stomach the risk of a downturn and volatility. Remember that markets can be depressed for really long periods. After the worst one-day crash of 13% in a day, the markets took over seven years to get back to sustained recovery—with lots of volatility in the interim.

All those stock pickers who are rushing in to buy as the markets have crashed should remember this—market recoveries can be long and painful. All those rushing in to sell should remember that market recoveries can be short and quick. You need to be a bit of a boring kind of person to invest in the stock market. Not so excited at a fall that you rush in to buy, or so afraid that you rush in to sell. Financial planning has rules—if you follow them, you don’t worry about sudden market moves.

End Note

This is a great time for the small band of intrepid financial planners of India who have solidly worked on building a client base on the ‘right-selling’ financial planning principle over the past 10 years. To turn away an 80% first-premium commission on an investment of a few lakhs is not the easiest thing to do, especially when your business is new. Some of the financial planners on my Twitter timeline reported having a normal day at work—hardly any calls from panicked clients; others spoke of calls where people just wanted reassurance. Right selling means managing expectations of the clients and constructing a portfolio that rides out market storms. Those who built the foundation right are sitting with great client books today.

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Watch the value of the market rather than punt about its levels

Monika Halan, Mint 4/6/2014

source: http://www.livemint.com/Money/7G9uK0FBH5eAl2al3e1KCK/They-say-the-Sensex-will-touch-40000-Will-it.html

They’re saying that the Sensex will touch 12,000?” She said in a hushed whisper. It is 2005 and I am talking to a senior citizen couple who have come as guests to get their financial plan made in my first television show called Show Me the Money with NDTV. I remember being unhappy with their 100% stock allocation at a time when their had unmet lifestyle costs. I had wanted a rejig of the portfolio towards some regular income products while leaving at least half the portfolio in stocks. But the thought that the markets will keep rising kept them from doing anything about their portfolio. The next decade saw the same index soar to just over 20,000 in January 2008, then drop like a stone in water to just over 8,000, 14 months later in March 2009. The Sensex is flying at almost 25,000 now and the question remains the same, with just a change in value. “They say the Sensex will go to 40,000 soon; will it?”

My answer remains the same—don’t watch the index; it tells you almost nothing. At its very simplest, a stock market index is an average reflection of the prices of 30 or 50 or 100 or 500 stocks. Looking at the index level to invest or sell is uneducated because the information that an index value carries has very little to do with what the future holds. Rising or falling stock market indices simply tell you the direction of the mood in a stock market. To understand this better, let’s look at the price of a single stock. The price of the stock, too, has no information in it to predict the future—it is simply the price somebody is paying for one share to somebody who is selling that one share. Very simplistically, when there are more buyers than sellers, the price begins to rise. How high it will rise depends (again very simplistically) on the value of the share. Which brings us to the question: why does a share have a value at all? Isn’t it a punt where speculators make it go up and down? Speculators may affect share prices in the short term, but the overall direction of prices depends on the ‘value’ of the share.

When you buy a share in a company you are agreeing to take the risk the entrepreneur takes to the extent of your holding in that company. Therefore, it is called ‘share’. You share her risk. If you bought the company’s bonds, you would get a predictable return every year. But when you ‘share’ the risk, both the upside and the downside are much larger.

As an investor, you are hoping that the company you have funded (in however infinitesimal manner) will make profits at an increasing rate. If it makes Rs.1 crore this year, it will make Rs.1.5 crore the next year and Rs.3 crore the year after, and so on. As an investor, you can see your share of profits as earning per share and the company also declares dividend from the profits. If the total number of shares is 100 and the company makes a net profit of Rs.10,000, your one share has ‘earned’ Rs.100 (assume you bought the share for Rs.10). But you don’t get this money in your hand. Now suppose your friend wants to buy your share. Will you sell for Rs.10, or Rs.100, or more?

More, right? Because you think that next year, the profit will be Rs.20,000, taking your share of the profit to Rs.200. If you sell at Rs.200, then the ‘valuation’ (price-earnings) of your share is Rs.200 (price) divided by 100 (earning per share), or 2. This means your friend is buying your share knowing that at the current level of profit, it will take him two years to recoup his investment. But she buys at twice the current value hoping for an uptick in profit.

Now expand this example to all the stocks in the index. The absolute value of the index has no information in it for the future direction. The valuation of the index does give a pointer. The current ‘discounting’ or price divided by earning per share of the Sensex is near to its 10-year historical average of 17.8. If prices keep rising without the earnings growing, the market will ‘correct’ and come back to a more reasonable level. But if the earnings grow, there is room for prices to keep rising.

Do you see why markets are up? In the expectation of India being open for business again after a 10-year period of a reversal to the 1970s business-is-bad philosophy. This will eventually translate into profits and earnings growth, which will reflect on the market. So if you really have to watch something, watch the ‘value’ of the market and the prospects of India coming out of the current growth decline rather than punt about stock market levels.

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Now that election results are out, what happens next?

The next event that the market will look forward to is the Union budget

Rajesh Kumar, Mint 16/5/2014

source: http://www.livemint.com/Money/5BFhfT699efhDqipdLHJYK/Now-that-election-results-are-out-what-happens-next.html

When the stock markets opened for trade on Friday, 16 May, early leads were suggesting that the outcome of the general election was going to be much better than what the street had expected.

As a result, the market opened with a gap up and, at one point, the S&P BSE Sensex was up over 1,400 points compared with its previous close and crossed the 25,000 mark, though it gave up some of the gains later in the day on profit booking. BSE Sensex ended the day’s trade with a gain of 0.90%, with cyclical sector indices such as Realty and Bankex gaining 5.97% and 4.39%, respectively.

Before the markets closed, the Bharatiya Janata Party (BJP)-led National Democratic Alliance (NDA) had either won or was leading in 340 out of the 543 seats. However, what surprised the markets positively was that BJP on its own accord was either leading or had won 283 seats, which is sufficient to form government at the Centre. “The outcome is much better than what the market was expecting,” said S. Naren, chief investment officer, ICICI Prudential Asset Management Co. Ltd, adding that there is scope for Indian equity markets to get re-rated in the short-term. Mid-caps and infrastructure sector would do well from here on, said Naren.

This view is shared by others. “Markets can go up 20% from the present level,” said Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities Pvt. Ltd, who is bullish on select companies in the capital goods and infrastructure sectors.

Clearly, the mandate in favour of BJP and NDA is much stronger than what anyone on the street had expected. It is for the first time since 1984 that a single party has managed to win so many seats in the lower house of the Indian Parliament.

A clear majority in the Lok Sabha will help the new government push legislations and reforms. Therefore, there will be high expectations from the government, which is being reflected in the stock prices. BSE Sensex has gained about 8% in the last one week.

So, where will the markets go from here? “Over the past decade, a fragmented coalition with differing economic ideologies had been the key reason for the economic malaise. The historic verdict, hence, justifies a re-rating of the Indian equity markets,” said a note from Deutsche Bank.

Plan of action

Since the market had already run up a lot in anticipation of the election outcome, there is a chance that it takes a breather before making the next move. “Markets can consolidate,” said Andrew Holland, chief executive officer, Ambit Investment Advisory Pvt. Ltd, adding that markets will now look forward to the formation of the government and will be keen to see who takes over as the finance minister.

Now that the much-watched general elections are over, and the outcome is clear, the next event that the market will look forward to is the Union budget.

In terms of risks, said Bandyopadhyay, poor monsoon and rise in interest rates in the US can still upset the market.

A decisive majority in the favour of BJP-led NDA is likely to keep the street upbeat in the near term and the market will now focus on the formation of the new government, and how it deals with some of the marco economic challenges such as containing consumer price inflation and kick-starting the investment cycle, which will help revive growth.

All eyes are now on the budget.

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