Don’t Get Off This Roller Coaster

On 21 September 2010, when the Bombay Stock Exchange (BSE) Sensex crossed the 20000 mark for the first time since January 2008, it didn't bring the smile back on 38-year-old K.J. Naik's face. Despite the bounce back, Naik's portfolio is down 50 per cent from 2008. "I had invested Rs 3.5 lakh during that high and today total value of my portfolio has come down to Rs 1.8 lakh," he says. Naik, who works with a private sector firm in Mahape, Navi Mumbai, had invested in Mundra Port, Gulf Oil, Sterling Resorts, Salora International, Marg Construction and Dhampur Speciality, among others.

"It doesn't make any difference to me if the index is at an all-time high. I have made huge losses, and the fear of losing more has kept me away from the equity market," says Naik. Instead, he is investing Rs 30,000 per month in a recurring deposit account with a co-operative bank. He says it gives him a guaranteed return and his money is safe.

Unlike Naik, 47-year-old Kishore P. Oswal, a high net-worth investor (HNI), is all charged up. An investor since 2003, his portfolio has doubled in the past two years from Rs 3-4 crore in 10 stocks to Rs 8-9 crore today. "I am always in search of multi-baggers, and market gave me the opportunity in April 2008." He says. "I picked up stocks such as Bombay Dyeing, Tata Steel, HDIL, IFCI and Century Textile that have doubled since then." Oswal has his own research team and is currently sitting on 25 per cent cash, looking for more opportunities.

"More players (institutions) are waiting on the sidelines to invest at slightly lower levels," says Gurunath Mudlapur, managing director, Atherstone Capital, a Mumbai-based investment bank. "This is the reason why the Sensex, rather than moving down from 18000, has surged to 20000. There is confidence that the market will find support at lower levels, thus capping the downside."

Since 1 September, Sensex and the National Stock Exchange's (NSE) S&P CNX  50 have been on steroids. But ironically, the retail investor seems to have missed the boat. Their primary investment vehicle, the mutual fund industry, has been the biggest seller in this market, because of redemption pressures or because of profit booking needs. And people have been cautious about investing; those like Naik will stay that way.

But if nothing much changed in the domestic scenario — the good news on economic growth and a good monsoon, and the coming decline in inflation had already been discounted — and globally, things haven't gotten very much better, what caused the shift in investor sentiment? The market's rise has been fuelled by foreign money, mainly from foreign institutional investors (FIIs), but is that money smoking hot, or will it stay? And if you wanted to board this gravy train, what should you do?

The Land Of The Rising Market
It took just 14 trading sessions for the Sensex to move from 18000 to 20000 mark, lifted by the rising tide that came with the QE2. No, not the ocean liner Queen Elizabeth II, but the second wave of quantitative easing undertaken — or announced as further stimulus packages — in the US, Japan and parts of Europe.

"First, there has been a substantial re-allocation away from the US-Euro zone into emerging markets," says Rashesh Shah, chairman and CEO, Edelweiss Capital, a Mumbai-based financial services firm. "Second, we are probably looking at ‘Decoupling 2.0' because of the quantitative easing. A lot of pent-up liquidity and demand has been released after the markets have been almost stagnant for nearly nine months."

Shah's view is echoed by others. "India is benefiting from the deflationary trade in the western world," says Abhay Laijawala, director and head of research at Deutsche Equities in Mumbai. His target for the Sensex since January 2010 for the calendar year is 22000.

"The broad index, Nifty, is catching up with fundamentals, trading 25 per cent below the previous peak, while the corporate earnings have recorded a 30 per cent rise over that during the previous peak," says Ridham Desai, managing director at Morgan Stanley India.

The weakness of the dollar has added impetus. On 28 September, the rupee strengthened to break the Rs 45-barrier against the greenback. "The market rally in September is not isolated to India; it is a global phenomenon," says Punita Kumar-Sinha, senior managing director at Blackstone Asia Advisors at Boston, which has been managing the $1.8-billion India Fund since 1997. "However, a correction can't be ruled out in this market if this money is withdrawn. In India, the money has come primarily through exchange traded funds (ETFs); players investing through this route are taking an exposure to India, but aren't allocating money to specific stocks."

But India still has cornered the lion's share of the flows to emerging markets. So how does this rally differ from that of 2008? "Growth in corporate India has come without much government interference, unlike countries such as China where the government is more involved and making structural changes in the economy (moving from an export-led to a domestic consumption-led economy)," says Kumar-Sinha. "India has, therefore, gotten more attention among global investors."

And then there is the familiar story about India's domestic consumption-led growth, compared to that of the export-led growth in China and other emerging markets. While the global economy is still struggling to find its feet, India's dependence on the US and Europe for growth is minimal.

The positive macroeconomic environment is also creating a strong platform for corporate earnings growth. Monetary policy is perceived as being effective enough to anticipate any asset bubble even as it fights hard to control inflation. All good, of course, but is this rally sustainable or just another big flash in the pan?

Trend Spotting
"I don't know what is going to happen in the next three months," Pradeep Dokania, chairman, Merrill Lynch Wealth Management India, confesses. "The market has its own logic, and most of the time it also defies logic. However, in the medium- and long-term, markets still remain strong on the back of high economic growth and earnings growth."

Others are similarly bemused, citing factors that loom just below the horizon. "Unforeseen incidents related to political developments in the country, a further rise in inflation or slower than expected execution by companies could spoil the party for India," says Kaushal Aggarwal, managing director at Avendus Capital, an investment bank.

Add to that the possibly adverse reactions on the Ayodhya Ram Janmabhoomi judgement by the Allahabad High Court (at the time of going to press, the high court had decreed that the land should be divided into three parts; but it maintained the status quo for three months). Kashmir is another sensitive issue that could derail the Sensex's upward march.

But others are less worried. "Money has gone into quality stocks," said well-known investor Rakesh Jhunjhunwala, CEO of Rare Enterprises, in a public forum on 27 September. "The market has already anticipated the geopolitical issues. Nothing is going to happen in the market, unless there is a riot in the country."

All too often, the sustainability of a rally is dependent on retail investor participation. Rather than inviting them all to jump aboard the bandwagon, money managers are advising restraint. The advice being handed out varies from "go to the primary market, young man" to "try the systematic investment plan, sir".

There is no consensus view on whether retail investors should join the party. However, companies are taking advantage of the sentiment to see if they can launch initial public offerings (IPOs) successfully.

Insider Profit Opportunities?
Unfortunately, too many investors have been burnt by IPOs. Take some of the most recent ones. National Hydroelectric Power Corporation's (NHPC) IPO raised Rs 6,038-crore when the Sensex was around 15000, issuing shares at Rs 36 per share in August 2009. A year later, when the Sensex is at 20000 plus, NHPC's stock price is still hovering at Rs 32 per share, down 11 per cent from its issue price.

But IPOs are back, nevertheless. In the past 15 days, 13 companies raised nearly Rs 3,500 crore, the largest of them being Orient Green Power (Rs 900 crore). "Always, whenever the secondary markets get vibrant, they provide the foundation for IPO markets to blossom," says Atherstone Capital's Mudlapur. "This time is no different. Expect this resurgence to continue for some time."

The IPO boom has been big since January 2010: till 28 September, 53 companies have raised Rs 41,500 crore, compared to Rs 19,550 crore collected by 21 companies in all of 2009. According to market tracker Prime Database, another 40-odd firms are planning to tap the primary market for another Rs 54,000 crore. But IPO returns have been dismal thus far.

Of the 42 companies that listed in 2010, 11 companies listed below their offer price, while another 17 companies did not give investors any gains from listing. Jaypee Infratech, for example, raised money at Rs 102 per share in April, and even after five months the stock is languishing at Rs 92-93 per share when the Sensex has jumped 15 per cent since April.

"It takes greedy promoters and investors to create madness," says Sameer Kamdar, CEO at ASK Investment Managers that manages nearly Rs 3,000 crore of assets of HNIs. The story has not changed much recently. Indosolar issued shares at Rs 29 each to raise Rs 357 crore from the market on 15 September 2010. On 29 September, the stock listed at Rs 29.75 per share, but ended at Rs 23.70, a fall of 18 per cent below offer price. "The promoters are getting greedy, they don't want to leave a dime for investors," says a senior investment banker. "If markets were not buoyant, the majority of them wouldn't have been able to sell their issues."

The Answer Is Blowing In The Wind
IPOs apart, will the market stay on the high it seems to be on now? "Currently, there isn't any worry; until retail starts buying, this (Sensex) doesn't go down," says Aggarwal. "But we will have to create new industries like microfinance or affordable housing for the market to absorb excess liquidity that just started."

"We expect Sensex earnings to grow at a compounded annual growth rate (CAGR) of 26 per cent for FY10-12," says Deutsche Equities' Laijawala. "We are bullish on the market and see the index rising by 15 per cent in the next one year," says Morgan Stanley's Desai, whose stockpicks are in sectors such as retail, media, banking and financial services and infrastructure from a long-term perspective. "With a horizon of 12-18 months, real estate and infrastructure stocks are a good investment at current levels."

But others, such as First Global's Shankar Sharma, think the market is ripe for a correction. He has been predicting a 20 per cent correction from an index of 18000, while a few FIIs, mutual fund and insurance companies have gone on record saying they will be comfortable investing below 18000 levels.

Blackstone's Kumar-Sinha seems to agree. "Our Asian funds are underweight on China and roughly in line versus the index on India," she says. "But I am a little concerned of the way the Indian market has risen. Valuations are not at the peak, but it certainly isn't a cheap market; I am adjusting the portfolio, by booking profits in some stocks and investing in others."

In other words, a correction would be healthy. Or at least, preparing for one. "We are cautious, but the weakness in the dollar will continue to drive FII flows into India, thus helping this party to continue for at least for the time being," says Nandan Chakraborty, head of research at Enam Securities.

Look For The Upside...
This scenario begs the pertinent question: what should you be doing? "IPOs are not the best bet to invest in," says Jhunjhunwala. "Investors are buying as if there is no tomorrow, but I see tomorrow. Valuations in the IPO are going berserk and I am confident that I will get opportunity to buy the same stock at a lower price in the secondary market."

"People should stay invested," says Edelweiss' Shah. "Whatever percentage of your portfolio is in equities, maintain it. Come in slowly, there is no rush. And if you can wait for a correction of 100-200 points, do that." Shah also thinks that systematic investment plans, or SIPs, are good for those with a monthly savings surplus. Jhunjhunwala agrees that SIPs are a good idea.

In the middle of the kind of optimism that prevails at this time, it is easy to forget about the risks, so listening to a financial advisor might be a good idea. "Equity investing can be volatile and India being a high beta market, it often corrects 20-30 per cent in a jiffy," says ASK's Kamdar. "If you are convinced that we are at an inflection point and the best is yet to come, then any entry point is good."

Hemant Rustagi, CEO, Wiseinvest Advisors, a Mumbai-based financial advisor, says a safe bet would be to invest 30-40 per cent upfront of investible surplus in diversified funds and then continue to invest at graded intervals. "This helps capture both upside as well as downside," he says.

Mutual funds may be sellers just now, but don't read that as their take on the market. Timing is not everything, but time could well be. Investing in the Reliance Growth Fund at a net asset value of Rs 15 per unit eight years ago would have yielded Rs 500 per unit today. Patience is a virtue in investing.

...But Don't Forget The Downside
Could anything spook the market's climb? There was some fear that the court verdict on the Ayodhya tangle could put a dent in the market, but now, that appears unfounded. Even before the verdict was announced in the evening of 30 September, the market gained a hundred plus points.  Another shock could come from the global system: another global panic perhaps. But the chances of that are also receding, as fears of a possible double-dip recession fade. But one ghost remains in the room: inflation. Most market folk tend to pay lip service to concerns about inflation, but few consider it a serious factor. A casual survey of history could show how wrong that kind of thinking could be.

In the next two weeks, it will be earnings season again. Some stocks could get hit, others may take off. But overall, it is expected to be a good time of year. It is also the festive season, and stretches all the way to mid-November. October, usually considered a bad month for stocks, could lose its bad karma this time round. (On 1 October, Sensex went up by 375 points to close at 20445.) But then again, maybe not.

For the past 30 years, the Sensex has had a history of moving in multiples of around six every 10 years. Starting 1978, the index went from from 100 to 600 in 1988-89; it then rose to 3600 in 1997-98. In 2008, it touched a high of 21200. If that trend holds true till 2018, the Sensex could very well go beyond 127000. Is Naik listening?

mahesh(dot)nayak(at)abp(dot)in