This Market is Not Falling!!!

This market is not falling!!!

Equity markets saw continuous run up post a very shallow correction in October. From a low of 25,910 on Sensex on 17 October, it took barely 15 days to reach a level of 28,000. This rally hardly gave an opportunity for many investors waiting for meaning full correction on index. I feel we are again sitting on a cusp – cusp of unbelievable rally. I am trying to reason it out in a simple way.  Well, these are my guesses researched on the basis of past market behaviors and the way this rally has been shaping up.

The result season –

This result season has been more tilted towards disappointment, nevertheless there were some green shoots in major sectors as well as surprises in midcaps. On a disappointment side PSU banks were a shocker. Almost every PSU bank came out with deteriorated asset quality and provisions increased multifold, in some cases 3 times. Certain infra companies and cement companies met the expectations on the other hand. Two wheeler auto companies posted a record sales in Diwali and E commerce companies are finding 24 hours less to sale their products. Major consumption companies like Titan shocked the street with weak numbers where as shoppers stop, Vijay sales and future retail posted expansion in margins and top lines. The companies’ likes of Thermax posted a great result on the back of exports but the domestic sector was yet to pick up for them.  The Q2 results didn’t show any recovery and that has left many investors worrying. The market run up has been making many such investors feel  the valuations have run up very fast and situation on the ground is not supportive.

Government actions –

Many believe government talks of reforms have yet not been the reality. Whereas I feel this government has shown and convinced investors that It can take tough actions for the benefit of India. This conviction has added to the euphoria of FIIs for india which will not wane so easily as each one of them knows reforms can’t be equated to instant coffee.

The Modi government has rolled out some key reforms, including diesel deregulation, allowing private participation in coal mining, liberalizing the foreign direct investment regime and changes in labour laws. It has also unveiled initiatives to turn around country's manufacturing sector through its "Make in India" programme and by announcing to make submarines in India. Initiative of Jan Dhan Yojana has also been a fair success and is going to be ongoing activity. Some constructive action is also expected on land reforms. Apart from this Mr Modi’s social agendas like “Swachha Bharat” mission, “Clean Ganga” mission going to help India in long term in improving the tourism and domestic connectivity.

What is going against India –

The major negative news against india’s economy is increasing fiscal deficit for this year. We are almost at 82.6% of budgeted estimate for the year. The tax revenue collection has been tepid (I hope the black money trail is real & it may add some revenue). The expected disinvestment programme as usual may cover up the short fall.

The European economy still showing signs of weakness. Although, easing is expected in Europe but still it is more of a speculation yet. However, geopolitical scenario has been stable.

Global Scenario –

The BOJ couldn’t have timed QE better than this. The US QE has just been over but the data couldn’t have been soother than this and it is expected to be so, for some time. US FED has been assuring of no interest rate hikes unless they get a comfort of consistent better jobs data. There is an expectation of easing in Europe which may be addition to flush liquidity. Recent bygone election results in Brazil which favored pro incumbency has made it all the more not so favorite and falling commodity prices make it more vulnerable. All this has led to make India a more favorite destination which has lot many positives - Interest rate cut, pro growth government, improving consumption story, rerating candidate, falling commodity prices. India, Thailand & Indonesia are expected to be favorites.

My View –

It is certainly agreed that the growth has not picked up in India and it still needs a push. Actions like interest rate cut, additional impetus to manufacturing, improvement in ground level activity will have some impact. These all actions will result into results after some time at least 6 months. Nevertheless, everyone has to agree that this government has been taking pro growth measures, the results of the same are going to be visible in some time and patience will be the name of the game.

But, these actions certainly have created an euphoria around India, may be corporate results may not support it. But I feel the news around government actions till budget will keep the markets very happy. In the process markets will become expensive. On a forward earnings basis we are at 19 PE which is not cheap but certainly not expensive. I feel we have got a room to expand. My hunch is by April we will be around 22 to 24 PE which can have Sensex in the range of 32,000 to 34,000 and nifty around 9500 to 10,000. In this valuation range india will certainly face a risk of correction may be in the range of 20 to 30%. Its been quiet sometime we have been expensive.

Mind you, only Apple I phone is expensive because it has demand justifying its value and apply the same logic to India.

This market is unarguably buy on dips. A wait for correction may be quiet a longer one and yes there will be a correction but it may have your jaws dropped to unbelievable number on index before that.

Its my hunch!  

Are we sitting on breakout?                                                                                                                         

Its been quite some time to have penned down my thoughts. Markets have been keeping everyone busy. It has been hell lot of rally and yes those higher double digit returns corrupt the mind to just raise your confidence to arrogance level and investments slowly take a shape of betting. That’s the cycle I somehow have been trying to avoid. Nevertheless mind is prone to corruption.  Anyways, I am just going to write something about the view on markets, is it good time, is there any risk or no. let me make the thoughts more structured. I will avoid divulging much numbers.

Yes the rally in markets has been real, money flow has been amazing. At 26,500 we are sitting at almost 20 times current earning. I will not try to value market at future earnings as according to some analysts we may be at 16 times which is long term average. Analysts are justifying the stocks like reliance on FY16 valuation that’s rubbish according to me. We are no way cheaper at this juncture, lets accept the fact.

China as usual is much cheaper and available at mouth watering levels. China is just like Indian PSU banks whose PE multiples make them look darn cheap in any market and investors always get lured but HDFC bank despite being expensive outperforms the lot. FIIs always in emerging market rally give allocation to china and come out crying each time. India has a history to support as it has since 90s generated arguably the superior returns. So we are not cheap, nevertheless we are on the cusp of breakout. The consolidation for last one month clearly suggests the markets are waiting to breakout. All the numbers from finmin have been extremely encouraging, Mr Modi  has been making pretty good noises and fingers crossed his every step has been towards execution. The overall sentiment booster is actually the thing which he has been feeding.

Is it a good time to invest?

Indeed it is! But I will complicate the matters a bit here. We are sitting at 26,500 20 times earnings. Markets may chose to take the two kinds of routes from here for upside-

1. I expect the GDP number for Q1 to be a pleasant surprise and markets may take this as an event for breakout and we reach 30,000 Sensex in jiffy by December (may be early). Rally may begin from Monday, all factors are favorable- Crude is trading at extremely comfortable levels, inflation numbers look good, money flow remains smooth, US numbers are good and QE is reducing but its there yet, monetary easing in JAPAN and Europe may accelerate. Post December the real correction begins but 24,000 I feel will be a base and wont be breached. But that’s a good 20% correction you have been waiting for and markets look reasonable at 15-16 multiple. Here you will see the news like Mr Rajan goes right again, crash to continue and what not. The reason for breakdown will be global, Either the US rise in rates or crude spike or Europe again or Russia.

So it makes a sense to invest now and be a part of roller coaster ride as you will be at gains certainly.

2. Second thing that may happen is we have a consolidated & structured rise in broader index and good stocks perform and bad stocks and sectors get the beating. The reason could be all global investors behave cautiously on the back of geopolitical scenario worsening and in anticipation of US QE reducing, the rise could be more structured and we will have 5 -7% kind of corrections. I can’t comment on levels we see but certainly we will be 27,000 -28,000 kind of levels by March end. I believe this will be very hard time then as we will certainly be outperformer for the year but the markets will be listless. Still the investment will make sense as stocks and mutual funds will outperform in this scenario too.

Some may call my writing audacious as I am not giving any chance to a fall from here. A fall from here is certainly a possibility as we are not cheap at all but overall euphoria I feel won’t die in vain and so I am not considering that as probability in near future. Many people are sitting outside and may just be disappointed with me.  

My view -

I feel we are going to see much more valiant market. We certainly will have one fall but waiting for it may not yield anything.  Fixed income investors also have reason to cheer as very few are praising the efforts of Mr Raghuram Rajan. Rajan has been targeting inflation and using the interest rates as a gun pointed on the government. But, in a process may be first time an RBI governor is trying to create positive real return in economy. Fixed income blamed for not creating wealth may also be wealth creator for many in the process.

There are innumerable turnaround stories in the market, I am also working on the few, these are the multibagger ideas of the future, some have started working and some are in a process. Be vigilant but follow the allocation tactic. Or use wealth managers like me (:P).  

Risks –

Virtually there seem to be no risks for equity investors in near future and that’s the case always and so the “black swan” keeps us on the ground.

US risk  -

Money flow faces a bigger challenge in the near future. The hunky dory US economy which was fed by FED with QE will see stoppage of QE and virtually every analyst agrees the US will raise the rates in future. The trajectory of these rate hikes will decide the fate of Emerging markets in that tenure. Nevertheless, unprecedented level of easing by Japan may compensate a bit. Europe as well may see some kind of easing, its been some time, that EU nations have been demanding weak euro to boost exports, if it happens the robust US scenario may be taken over by robust Europe.

Some shocks will certainly be there. Existing geopolitical scenario possesses the power to change the track of markets overnight. Any kind of move by Russia over Ukraine, Palestine Israel issue, Iraq and even Pakistan may change the trajectory for markets. You cant plan for these but former issue I guess most are planning.  

How to plan for these?

Asset allocation is the only key. we are expecting  jaw dropping numbers in Sensex in next three years, Keep doing SIPs, invest more part of your savings, Use right instruments to invest in equities, avoid quasi products like ULIPs, some broker schemes promising 10 time returns. By keeping things simple you will be there. Have fixed income exposure, no harm in looking at 3 years FMPs, 9% tax free returns is damn good allocate for long term.

NO REAL ESTATE, NO GOLD, NO OTHER INVESTMENT INSTRUMENT HAS BEATEN EQUITIES IN LONG TERM. BUT ASSET ALLOCATION IS THE KEY!!!!!

How the 2014 is going to be?

How the 2014 is going to be?

Mostly when we ask the question how the 2014 is going to look like, everyone is taking it only politically. BJP supporters say its going to be MODI and rest say it’s going to be hung parliament and credit will go to AAP. Financial markets as well are weighing too much on the elections, they say if we have stable government then markets are going to be good else we have bad days nearing us. Is it really the thing? Can election be so much of deciding factor for India in current economic scenario?

I feel otherwise, I feel anyways we are in challenging times & will face lot of trouble come what may! Current vote on account in fact reinforced what I think and united bank of India tragedy is giving lot of signals.

Mr Chidambaram has left the time bomb ticking in this vote on account I feel. His triumphant claim that  he met the fiscal deficit target at 4.6% which almost every analyst, news channel and anybody who understands Indian accounts has called a blatant lie. Rollover of subsidies from current fiscal to next fiscal this year has on record been only Rs 35,000 crore and total fuel subsidy including this amount has been planned at Rs 65,000 crore. So if one removes the rolled over amount the fuel subsidy is going to be around Rs 30,000 crore against current year booked expenditure of Rs 85,000 crore. This alone means Rs 55,000 crore gap in fiscal (staggering USD 8.8 bn) if one was to think the spending will be at the same level.

Ashok Gulati of the Commission for Agriculture Costs and Prices (CACP) has said that the budget has not admitted to Rs 80,000 crore of food and fertilizer subsidies. Food corporation of india in case these subsidies are left unaccounted will be left with option to issue bonds which will create an additional burden or the next FM will account it to clean his slate which has always been the case.

The planned expenditure if has not been spent this year, its purely gimmickry by Mr Chidambaram as the India cannot contract in any ways and expenditure will just grow next year.

Its very strange that neither our revenues grew more than the target nor exports ballooned. We did not see extraordinary FDI in India despite that Mr Chidambaram has shown us 4.6% fiscal deficit and neither of us has objected the accounting. This is pure fraud if it was in any other company and auditors would have qualified it.

So the bottom-line is we are in risk to see increased deficit number next year unless we see another magic. The Nymex crude at this point is at USD 102. Crude always has at least one good rally in a year if it has to happen again this year India will not take it positively.

Indian bank’s NPAs are showing up slowly. United bank of India is live example. Government may get away by saying its one of its kind case but almost every financial expert is aware of Indian PSU banking system which has had a history of manipulating NPAs and no wonder they traded always at such a low valuations for so long. It seems now it is becoming impossible to adjust them with numbers. This thing may have cascading effect and may spread as wildfire.

There are two risks, one being banks fraudulently lent without collateral and second the collateral itself is insufficient. IN United Bank’s case it was evident that many small accounts have also turned to be bad. It cant happen only with this bank only. The collateral the banks take mostly is real estate with many accounts turning bad the biggest pressure may come is on real estate. I am very sure the real estate may give up in some days the breath it has been holding for so long.

India on the other hand faces the risk of prolonged period of high interest rate. Most of the financial experts have been citing the 6 month as maximum tenure for this kind of interest rate scenario, whereas I feel we may see it for quiet longer. The credit to deposit ratio in no way going to come down. Reasons being  the economy is very much not going to expand next year at least very much certain for next six months  and savings rate will not grow for the same reason. Credits are not going to come down in any case as NPAs are mounting day by day  and forget about repayment.  We are trapped badly in high interest high credit to deposit ratio kind of scenario.

The increase in fiscal deficit, expected increase in crude, low expanding economy all are going to pose great challenges for rupee and interest rate scenario. These things may bring back the fear of ratings downgrade back to the markets.

Moreover this year again the El- nino is expected. If the monsoon is to face any kind of trouble we are very much in for a very big trouble.  In all 2014 to me doesn’t sound good at all. I see lot of risks to all asset classes. Gold and silver are the best bet. Liquid funds, FMPs and accrual funds may outperform the markets again. Equities may go up to some extent or consolidate mainly because of the valuation. But I am very sure there are lot more better countries are available. I am really not certain on foreign inflows in that case.

I am sorry if I sound too depressed but let me tell Mr Raghuram Rajan is already watching it too keenly and he has a tremendous power to depress us all. He must be thinking 50 bps more, lets see!!