The value of currency

Today, the most important factor driving the markets and one that will continue to be important in 2010 is the shifting out of dollar assets. There is a huge amount of dollar liquidity, along with that for the yen and pound, which is earning close to zero in terms of investment returns. Also, there is a fear of purchasing power erosion on account of deficits and printing of these currencies. This is propelling the big rise in prices of equities, real estate, gold and other commodities in emerging markets.

However, it is difficult to predict the kind of growth that companies will see in 2010. As economic recovery gains strength, it is expected to be better than in 2009. One needs to guard against stock prices that already reflect earnings growth many years into the future. What may affect the market negatively is a sudden dip in economic recovery. A significant tightening of interest rates and liquidity could also hurt.

Taking a longer term view, if the markets run up too much too soon, expensive valuations could be a major concern. Depending on how the currency moves, one could see exporters and service providers face pressure, while import-dependent companies could see improving margins. This will be contrary to what has been witnessed in the past 10-15 years.

It is important to understand the traps that come disguised as opportunities. Investors are prone to taking decisions based on the most readily and vividly available information. Chasing fancies in the market is a sure way of paying high prices and ending up a loser when the fad ends.

At present, there are two fanciful themes—power and real estate. How do we know this? Look at the number of public issues in the offing for these sectors and the launches of various mutual fund schemes. Every available information on these sectors is positive, and the listed stocks are market favourites and command high price earnings. The irony is that investors find a stock less risky when everyone is buying and the price is up. Develop the courage and conviction not to do what others are doing.

We are inclined towards city gas distribution companies such as Indraprastha Gas and Gujarat Gas. Natural gas availability is easing on account of the east coast gas coming into the market. Spot prices in the international markets have also come down. The volume growth had been mainly constrained due to the lack of availability, but now that gas is available, we see good prospects for these companies. We are also positive about the prospects of credit rating agencies like Crisil and Icra. With the RBI encouraging credit rating for borrowers taking loans from banks, the potential market is large.

This year will be challenging as fixed income securities will give negative rates of return, after adjusting for inflation, while equities and gold will become expensive. So, invest in a portfolio where valuations are still reasonable and are not driven by momentum.

Parag Parikh is the Chairman, Parag Parikh Financial Advisory Services