Before coming to the market, let me draw your kind attention 2 more thumb rules of investment in addition to the ones I had stated in my Market Digest-3:
1. Buy when everyone is selling and sell when everyone is buying. Don’t go with the flow. It is the contrarians who have made money in the stock market.
2. Don’t place too much trust in the modern day “Wealth Managers.” Most of them are more interested in creating wealth for themselves than for you by fast churning of your portfolio. Never allow anyone to manage your portfolio on discretionary basis.
And now let us come to the happenings in the market this week. From a high of 8633.50 on 22/7, the Nifty dropped to 8361.00 on 27/7, a fall of 272.50 points. P/E ration during the same period dropped from 23.96 to 23.21, a fall of 0.75 points. However, the recovery after Monday was not equally sharp between Tuesday 28/07 and Friday 31/7. Against the loss of 272.50, Nifty gained just 171.85 points from 8361.00 on Monday to 8532.85 on Friday 31/7 closing at a loss of almost 100 points compared to 8633.50 on 22/7. The P/E ratio also fell by 0.75 points during this period, from 23.96 on 22/7 to 23.53 on Monday 27/7. Against the fall of P/E ratio by 0.75 during this period, the rise in was just 0.32. This indicates that the market is not likely to remain in bull phase since it is making lower tops and lower bottoms.
The worst effected sector is the metal one with Tata Steel suffering a great deal in face of cheap Chinese imports. Realty sector is the worst sufferer with the unsold inventory being held by these companies in the neighbourhood of Rs.70,000 crore. While buyers are not prepared to buy at the existing rates with interest cost being too high, the sellers are not in a mood to cut prices in the hope that in another 6 months or so, the economy should revive. However, this is unlikely and the prices have to drop anywhere between 20 to 40 percent. With holding cost going up every day because of high interest rate, the realtors are likely to sustain heavy losses. Hence keep away from such companies like DLF, Unitech and others. Most of the realtors are highly leveraged and carrying huge debts in their balance sheets.
If the economy is too revive, interest rates must come down by at least 1.50 percent and this is bound to happen sooner or later but positively within 15 months. The investors who don’t mind volatility, should start putting money in Gilt funds. If they don’t lose their cool, they will run into money. Even long term Income (Debt) funds are good options. The yield may not be as high as in the case of gilt funds but an equal mix of both these funds should give 14/15 percent YoY yield over a period of 2 years. Dynamic Bond funds will have least volatility but the yield will also be lower, around 12 percent p.a. over a period of 2 years.
Another option is gold whose price has fallen sub Rs.25,000 per 10 gms. If you are not a little risk averse, start accumulating Gold ETFs on every decline you are bound to make money over a period of 5 years.
Wherever you invest at the present juncture and in whatever instrument, you will have to exercise patience to get a handsome return. This is not the time to invest in multi-baggers since there are hardly any left.
Don’t try your luck in public sector banks which are carrying a huge burden of NPAs. Government is throwing a life line of Rs.70,000 crore to recapitalise these tax-payers’ money suckers. Moreover, these have already moved up quite a bit on the expectations of an imminent interest rate cut and may fall if the same doesn’t materialise. I fail to understand how they could lend huge amounts of money to airlines like Kingfisher and realty sector companies without making an honest assessment of demand/supply scenario. The great SBI is the worst hit of all. Just now Hong Kong has fined dollar one million (HK$7.5 million) for violating its anti-money laundering and counter terror laws. In fact, these banks are far worse criminals than Mafia dons but none is made accountable and punished.
A hue and cry is being made of liberally lending to medium, small and cottage industries/businesses but on the ground, no money is lent to them without money changing hands. Here also middlemen are active working between borrowers and the banks.
The Indian markets have been quite volatile during recent months with Nifty hovering between 6,500 to 8500 levels for quite some time now. Earnings of the corporate sector have not been encouraging barring a few exceptions hare and there. In the process, the P/E ratios of the market have moved into danger zone. One has to exercise great caution in taking investment decisions.
There are various views circulating around. On one side, the view is that the stretched balance sheets will make it difficult for the investment cycle to pick up; and that market expectations will not be met.
On the other side, views are that as and when the cycle picks up, India Inc will be well prepared (considering the underutilized capacities) to meet the demand. This is measured by the low asset turnover and dull margin scenario. These are nevertheless facts that indicate a high probability of profit scenario improving going forward but this may take anywhere between 2 to 4 years. New projects and the installed ones will not take less time than that even if the same are kick started immediately the signs of which are not visible right now. Hence entering the stock markets at the present levels when the P/E ratio of Nifty is hovering in between 23 and 24 may not be the ideal thing to do. After a few months, the markets may gain greater sanity.
Please take investment decisions keeping all the above in mind. If you still want to take the risk of investing in the stock market right now, it would be prudent to take the diversified schemes of Mutual Funds route and that too through SIPs to be continued for at least 5 years. I prefer HDFC, Reliance, Birla Sun Life and ICICI Prudential all of which have large corpuses and have proved their competence since their inception.
With this, I conclude this issue of Market Digest.
DISCLOSURE: I hold no stocks at present. I have got investments in all the 4 mutual funds as stated above.
DISCLAIMER: Please take your investment decisions according to your psychology and risk bearing capacity. Even safest investments carry some element of risk