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Never Be Shy: Buy, Buy, Buy...
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In August 2011 — when the National Stock Exchange's (NSE), Nifty 50 index was at about 5300 — she made a return of 20-30 per cent by selling half her equity portfolio, and put the proceeds in debt funds. It was a smart decision; the market has fallen about 10 per cent since Mehrotra cashed out (Nifty closed at 4754 on 6 January 2012).
But true to form, when the Nifty was around 4900 at end-September 2011, she invested 10 per cent of her cash, expecting the Nifty to go back to 5200-5300. But this time, luck wasn't on her side; she lost about 20 per cent on what remained of her equity portfolio.
"I would have loved to enter the market if the Nifty corrects by another 150-200 points," she says. "But my worry is that I don't know where the market is headed." She is not the only one: for most investors, confidence in the equity markets is at a three-year low. India was the worst performing emerging market in 2011, having fallen by over 25 per cent, compared to the MSCI Emerging Markets Index, which fell by only 19 per cent.
Going by some analysts on television channels, staying out of the market may be the best thing to do. More than 60 per cent of the companies in the BSE 500 index have fallen by 25 per cent. What does an investor do?
A Grim Landscape?
Experts point out to one theme that runs through most markets: macroeconomic performance trumps the microeconomic. The high level of unemployment in the US — over 9 per cent — is unlikely to come down soon; jobless growth seems to have run its course. In Europe, the crisis may get worse.
Political and policy paralysis in India has become our Achilles' foot, forget heel. The fiscal deficit continues to get worse, and the government and the opposition are focusing all their energies on the state elections in February 2012. On the slightly positive side, inflation appears to be moderating, and the cycle of interest rate hikes may have ended, but that's all.
"What people are not seeing and which is not that obvious is that even if inflation comes down; India has to sustain a growth rate of 8-9 per cent for several years in a row," says K.R. Bharat, managing director at Mumbai-based Advent Advisory. "The government needs to inject an aggressive dose of second generation reforms. Forgot about coming, we are not even talking about it in India anymore."
|(from left) "Even if inflation comes down, India has to sustain a growth rate of 8-9 per cent for several years in a row" K.R. BHARAT, managing director, Advent Advisory|
"When everyone else is pessimistic is the most opportune time to be greedy; That's the principle of investment" KAUSHAL AGGARWAL, MD, Avendus Capital
The weak macroeconomics, loss of confidence and a worsening trade balance have had a big impact on our external symbol of economic strength: the value of the rupee, which has declined by nearly 20 per cent in the second half of 2011. This has implications for our dependence on foreign institutional investors (FIIs).
The Foreign Hand
Over the past decade, FIIs have had a critical influence on the direction and the performance of our stockmarkets; that has extended to other forms of investment, and been a barometer for other asset classes: real estate, bonds and private equity. A weak macroeconomic outlook, a declining currency, and the flight to safety all add up to FII outflows. "It's not India; the phenomenon is worldwide," says Alok Sama, founder and president of London-based Baer Capital Partners. "It has been the worst period in the past three years in investing."
Let's not forget valuations. Indian companies compared to their peers in other emerging markets are more expensive; and their performance hasn't been particularly spectacular either. China, Russia and Brazil trade at 10, five and six times 2012 earnings; India trades at 14 times.
The third and fourth quarter earnings of Indian firms in FY2012 are not expected to be great; "They have slowed critical investments, reached the limits of cost cutting, and many are laden with uncomfortable levels of debt," says the head of a leading research firm.
|ALL THE GLITTERS... India has mostly been a consumer market for gold rather than an investing one (ABP)|
But not everyone is a pessimist. "While Indian equity markets have fallen in price and valuation terms, we have retained our premium over peer markets because of our growth potential," says Nilesh Shah, director, Axis Direct.
Some global economists, too, think the India growth story is still a great draw. Joseph Stiglitz, winner of the Nobel Prize for economics in 2001, said in a speech at the Indian Statistical Institute in Kolkata on 11 January, that India had been doing a good job when other countries and institutions in the developed countries had faltered. If we manage our policy well, and guard against an overblown financial sector, India will be able to manage to grow in the face of a global economic slowdown.
"India is not growing as fast as China, but it's not as exposed to overheating as China is," billionaire George Soros, founder of Soros Fund Management, told a television channel.
Then, there are businessmen within our country, too. The overall investment picture may look bleak, but many companies have nevertheless gone ahead with their growth plans. Take Kiran Mehta, chairman and managing director of Varun Industries, which bought a manufacturing unit in Nasik to make pressure cookers and non-stick ware. "The Indian consumption story is still strong," says Mehta. "We felt it's the right time for us to venture into this segment of the domestic market."
So far, Varun Industries has been an exporter, selling stainless steel household products in markets like the Middle East, Africa, Europe, the US and South America. In the first half of FY2012, the company's after-tax profits grew 41 per cent, at Rs 34 crore on revenues of Rs 1,839 crore, which were also up 42 per cent.
|HOME OPTIONS: Buying a house is no longer a permanent investment, as people get more mobile (Bloomberg)|
Others have followed suit. SKF Bearings announced that it would invest Rs 130-150 crore for increasing its capacity and developing new manufacturing capacity. Granted, these are not exactly large investments, and most of the evidence is anecdotal rather than systematic.
Where (And How) To Invest
Despite all the uncertainties and pessimism, should we continue to invest in the stockmarkets? Or any other asset class for that matter? Kaushal Aggarwal, managing director at Avendus Capital, a Mumbai-based investment bank, paraphrases legendary investor Warren Buffet. "When everyone else is pessimistic is the most opportune time to be greedy," he says. "That's the fundamental principle of investment."
The problem is, stocks look overpriced, or are expected to go lower, which might bring back people like Mehrotra. But some believe that waiting may not make sense, as many companies are fairly valued at 10-12 times forward earnings (earnings for FY2012 and FY2013).
So, should you stay away from the markets? Not really. "There is a wide divergence, and you could find stars and dud in the same sector," says Saurabh Mukherjea, head of equities at Mumbai-based Ambit Capital. "But you have to be careful; cherry-picking is the name of the game."
Other folks who have been in the investing business for a long time concur. "Having gone through the year-long turmoil, valuations are now below historical averages and the risk-reward equation for equities is favourable," says Motilal Oswal, chairman and managing director of the eponymous Motilal Oswal Financial Services.
It is also a market in which investors' tolerance has been tested. Those who lost money will not find it easy to accept advice to invest more. Many have no disposable cash left for equities. As the financial year draws to a close, it seems a bad time to book losses on your portfolio.
Many experts we talked to offered some compelling logic to invest. First, they say, FIIs will be back in January and February because they make fresh allocations at the beginning of the calendar year. Given how sensitive markets are to FII inflows, that will take the market up.
Second, they say, history is on our side. The logic: since the 1980s, stockmarkets have followed seven-year cycles, over which markets have returned an average of 17 per cent annually. As they have lost money over the past four years, they should make up in the next three; that implies that markets should more than double by 2015, if not earlier. Several experts are gung-ho about stockmarket performance this year.
So we asked a number of them about cherry picking five stocks they believed would be the best performers in 2012. Seven of them were glad to oblige, and the eighth was an institution, Axis Direct. The list of 28 ‘winners' they picked is listed on pages 43, with a short description of why they favoured those particular stocks.
On the list are some very familiar names: Mahindra & Mahindra, Bharti Airtel, HDFC Bank, Infosys Technologies, ITC and State Bank of India were named by more than one expert. The range of estimated price performance was also revealing in some ways: from a negative 5 per cent at the worst, and close to 15 per cent at the best, which for large cap frontline stocks is a lot.
"This is the gloomiest period of the past 20 years, and you have to pick stocks that will help you sail through tough times," says Mukherjea of Ambit Capital. Avendus Capital's Aggarwal suggests that investing in the BSE Sensex of 30 large cap stocks may be the way to go for investors with a low risk appetite. "That could make them 15-20 per cent per year," he says.
Personally, Aggarwal likes infrastructure and financial sector firms, but isn't too clear which two or three will be winners. But infrastructure and finance stocks have been the hardest hit in 2011. With the government in a political pickle and interest rates being as high as they are, Aggarwal's preferences might seem odd.
Are many people willing to take bets on risky sectors for potentially high rewards? Ashith Kampani, managing director of JM Financial, likes alternate energy stocks, such as solar energy. He is also bullish on the overall India growth story. "With the government's social welfare programmes putting cash into people's hands that generate huge consumption, the need for infrastructure will be huge, both physical and social. So infrastructure, education, services and agriculture sectors will be preferred choices."
Bonds And Other Animals
Investment is not restricted to the equity markets alone, of course. While institutional interest in the bond market is much greater than individual or retail interest, several large bond issues made in the past six months have been well received by retail investors. Government companies — NTPC, Power Finance Corporation and several others — have also made successful bond issues, and plan to make more.
Retail investors also like investing in liquid mutual funds as an avenue of balancing debt and equity in their portfolios. But not all debt issues have excited investors across the board; the primary concern of most investors in debt has been safety. To get a better idea of the outlook on debt market investing in 2012, we turned to one of our experts.
Gold has hogged the headlines for most of 2011. But India has mostly been a consumer market rather than an investing one for gold. But that is slowly changing, with gold exchange traded funds, gold investment and savings schemes from companies like Muthoot Finance and Manappuram Finance.
For some, investing in commodities can be exciting; the caveat is, it is largely a trading market. The cost of investing in these markets has gone down considerably, as have investable amounts. Unlike stockmarkets, the menu of investable commodities is small: gold, oil, spices and futures. We called on an expert to get his views, which you can read on page 60.
Real estate is a asset class, but one in which assets are lumpy rather than smooth; they are very big ticket items, and while these isn't a trading market for them, knowing the best housing markets will become important in years to come. Buying a house is no longer a permanent investment, as people get more mobile with job changes and relocations.
In the US, the average period for which people own houses is five to eight years, and where the average mortgage is 30 years. It is conceivable that demographic changes could create a housing and mortgage market in a decade or so. In the meanwhile, staying up-to-date with what drives housing markets may be interesting, so read what our expert has to say, on pages 58.
The Name Of The Game
If recent events are anything to go by, experts have been as wrong as anyone else about what direction markets will move, and what causes those movements. "Global events, domestic policy, the contagion from other markets have all been standard explanations, but strangely unsatisfying," says the head of a large mutual fund, who requested anonymity. "Expert analysis looks sound, but has been wrong too frequently."
Could you do better than an expert, given the same level of information that experts might possess? Or would a random choice of stocks put together as a portfolio make as much money as a portfolio by experts?
We took the liberty of creating just such a portfolio; think of it as the equivalent of putting up the stock pages on a dartboard and throwing darts at it. Through the course of 2012, we will bring you monthly/fortnightly updates on two indices: the Expert Index, made up of expert picks and the BW Dartboard Index, and their relative performance compared to the National stock Exchange's CNX Nifty Fifty Index. For preparing and maintaining the indices, we drew upon the services of Gurgaon-based Indxx Capital Management Services.
The signs don't look very promising for 2012 at this juncture. Nevertheless, we wish you, our readers, a Happy Investing Year. May your portfolio multiply many times.
(This story was published in Businessworld Issue Dated 23-01-2012)