Filled with Hope

Sarbajeet K. Sen, Rahul Oberoi and Sowmya Kamath    Delhi     Print Edition: November 2011

While the top guns of India's stock markets have made widely different bets for the future-just the way it should be in any market situation-there's a common thread that runs through their strategies. All of them are hopeful about the growth of India's equity market and its ability to create wealth over the long run.

Some may argue that these are assessments of a few individuals and things may not turn out as they say. While it's true that predicting market movement correctly is very difficult even in the best of times, let's look at some numbers on how India's equity markets react to global crisis and unexpected domestic events to show that these investors know their game.

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An HDFC Mutual Fund analysis of the movement of the Bombay Stock Exchange (BSE) Sensex shows that the index climbed 316% in five years after the September 2001 attacks on the World Trade Center in the US and 212% in five years after the unexpected defeat of the National Democratic Alliance government in the 2004 general elections.


20% is the annualised return given by the Indian stock market between Sept 2001 and Sept 2011.


In three years after the global financial crisis came to a boil with the collapse of Lehman Brothers in October 2008, the Sensex has risen 82%-that too after being held back by the debt crisis in some big Euro zone countries and fears of the US slipping into recession.

This is the overall market picture. There are stocks that have given better returns than the market. A wrong call, of course, will have left you counting losses, which, too, can happen in any market.

THE P/E PUSH
When the Sensex touched the peak of 21,005 on November 5, 2010, it was trading at a price-to-earning, or P/E, ratio of over 24. From that level, it fell over 29% till October 7, 2011, to 16,233. On October 7, 2011, the P/E ratio of the Sensex was 17.8.

According to historical data, a P/E ratio of less than 18 is an excellent opportunity to build wealth. Between 2001 and 2008, the P/E ratio of the Sensex fell below 18 seven times. On two occasions, the Sensex gave a return of over 150% in the next three years.

History in the making: Sensex performance over past 3 years
Market experts say the recent fall has made the markets attractive. Lalit Thakkar, managing director, institution, Angel Broking, says, "This is a good market for long-term investors. After the correction over the last few months, the Sensex is trading well below its average value and its earning yield is near the bond yield. A long-term investor can use this opportunity to buy quality large-cap shares."

Market trend: Should FIIs be trusted?

Gagan Randev, chief executive officer, Religare Securities, agrees. "With the stock market falling over 11% in three months till September 2011, the valuation has dropped to the fair to undervalued zone. We believe investors should increase allocation to equity at current levels with an investment horizon of one to two years. We are neutral to bearish in the short term due to global concerns such as the European sovereign debt crisis and slow US recovery. We are bullish in the medium term."

SHORT-TERM PAIN
While the long-term picture looks bright, market experts say there may be uncertainty in the near term. Sudip Bandyopadhyay, managing director and chief executive officer, Destimoney Securities, says, "The indices may not do anything great in the next six to 12 months. During this period, a stock-specific strategy will yield the optimum result."

Pankaj Pandey, head of research, ICICI Direct, says the markets may fall further in the short term. "We expect more correction and the markets are likely to oscillate within a broad range till there is more clarity on various local and global issues."

Economic crisis 2008: What we can learn

On a year-to-date basis, till October 10, 2011, the National Stock Exchange (NSE) Nifty and the Sensex have fallen 18% to 4,979 and 19% to 16,557, respectively.

India markets v/s Global peers
Global indices such as Dow Jones of the US, Nikkei of Japan and Hong Kong's Hang Seng have fallen 1.25% to 11,433.18, 16% to 8,774 and 23% to 17,711, respectively, during the period.

Compared to the December 31, 2010 level, only six out of 30 Sensex stocks were trading positive on October 10, 2011. ITC was the biggest gainer with an increase of 14.7% to Rs 200, followed by Coal India (up 9% to Rs 342), Hindustan Unilever (up 6.4% to Rs 332), Mahindra & Mahindra (up 3.67% to Rs 806), Bharti Airtel (up 1.35% to Rs 363) and Bajaj Auto (0.8% to Rs 1,554).

In this uncertainty, if you are trying to find stocks with value, Bandyopadhyay has an advice-go for fundamentally strong, undervalued companies with good growth prospects. "A portfolio with shares of blue-chip pharmaceutical and FMCG, or fast moving consumer goods, companies may do the trick," he says.

For those who prefer the stock-specific approach, Money Today spoke to market experts to select 20 emerging stocks they you can buy and hold for the long term. The list includes Akzo Nobel India, Karur Vysya Bank, Greaves Cotton and Sintex Industries.

PRESSING TRIGGERS
High inflation has prompted the Reserve Bank of India (RBI) to increase interest rates 12 times since March 2010, hurting companies. This, with high fuel prices and industrial slowdown, has hit sentiment. To top it all, a falling rupee is discouraging flow of funds from abroad.

Let's discuss some market triggers and how they are expected to behave in the future.

Global cues: That India's stock markets are linked with global economies is clear from the fact that some of the steepest falls here are triggered by global developments. Since scaling an all-time intra-day high of 21,206 on January 10, 2008, the Sensex has fallen more than 700 points on 12 occasions.

Several of these were triggered by global factors. The latest was the 704-point decline on September 22 due to fresh concerns about slowdown in the US. It was the steepest decline on points for the Sensex since the 870-point fall on July 6, 2009.

On the recent downgrade of the US by Standard & Poor's and the debt crisis in some big Euro zone countries, Angel Broking's Lalit Thakkar says, "The US is relatively in a better shape and the rating downgrade is not a big issue. But the Euro zone has structural issues because of lack of fiscal unity. However, due to losses banks may incur or uncertainty and the complicated process involved if Greece opts out of the Euro zone and has to issue its own currency, the stock markets may remain volatile in the near term."

FII aversion: Other than worries about the health of the global economy and macro economic and political uncertainty in India, falling foreign institutional investor (FIIs) interest in the domestic equity market is one of the biggest concerns and must be closely watched.

According to the market watchdog, the Securities and Exchange Board of India, the net FII fund outflow was Rs 291.60 crore during January-September 2011 compared to an inflow of Rs 84,361 crore in the corresponding period last year.

Stubborn Inflation
Gagan Randev of Religare Securities says, "The rising dollar has precipitated these outflows. When markets find interest rates stabilising, inflation under control and the government taking important pending decisions to signify its seriousness in getting things done, confidence will return. FII money will be back as the global situation calms and we indicate that we are getting our house in order."

EPFR Global says investors are worried about the weakening global economy and have invested in stocks of countries with high credit ratings such as Germany, Canada and Switzerland. EPFR Global provides fund flow and asset allocation data to financial institutions throughout the world.

Rising inflation: The benchmark wholesale price inflation is near the double-digit mark. It rose 9.72% in September, almost unchanged from 9.78% in August. The figure was 9.22% in July. The RBI has increased its key repo rate, at which it lends to banks, by 350 basis points in the last one-and-a-half year to control inflation. A basis point is 1/100th of a percentage point.

The tightening has been criticised by industry, which says it has led to moderation in growth. In the first quarter of financial year 2011-12, India's gross domestic product, or GDP, grew 7.7%, the lowest in the last five quarters.

"The growth is likely to remain weak in view of stubbornly high inflation, fall in industrial production and the central bank's monetary tightening to control prices," says Gaurav Dua, head of research, Sharekhan.

How crude oil has moved since December 2010
Market experts have already lowered the GDP growth forecast for the ongoing financial year. In a press release on October 10, 2011, Roopa Kudva, managing director and chief executive officer, CRISIL, said, "We have anticipated that the impact of rising interest rates, slowing government expenditure and deceleration in advanced countries has been sharper than expected. This, in conjunction with weak investment climate, is impacting India's growth prospects. We are now projecting that the Indian economy will grow 7.6% in 2011-12." Crisil had projected 7.7-8% growth in May 2011.

On interest rates, Aman Mohunta, economist, Nomura Financial Advisory, says, "It seems the rates have peaked. We feel the central bank will pause and not raise rates further. Due to softening of commodity prices and good monsoon, inflation can start declining after December."

Crude oil: In the current environment where stock markets have corrected due to global worries, the decline in crude oil prices has come as a relief. Since the beginning of the financial year till September 2011, the price of crude oil has fallen 26% to $79.20 a barrel.

D Kannan, managing director, Kotak Securities, says, "With global growth slowing, commodity prices may soften. This may anchor expectations about inflation and interest rates in India, which will be positive for the market."

Oil accounts for a big chunk of India's total import bill. Over the last few years (between financial years 2005-06 and 2010-11), a sharp increase in crude oil prices has been inflating India's import bill.

Rupee-Dollar movement
The net import value of petroleum products has increased from Rs 1,50,000 crore in 2005-06 to Rs 3,15,000 crore in 2010-11. During the period, the average crude oil price (Indian basket) increased from $55.72 per barrel to $85.09 per barrel.

Market experts say India's import bill is expected to remain high as crude oil prices are unlikely to fall due to shortage and lack of alternatives.

"Higher oil prices will affect the government's target of keeping the 2011-12 fiscal deficit at 4.6% of GDP. It will lead to under-recoveries to the tune of Rs 95,079 crore for 2011-12 and Rs 71,000 crore for 2012-13," says Pandey of ICICI Securities.

Oil marketing companies incur huge losses, called under-recoveries, as they are forced to sell diesel, kerosene and LPG at less than the market price. A part of these losses is compensated by the government in the form of oil subsidy. Thus, higher crude oil prices are bad news for government finances.

INDUSTRY TRENDS
While a stock-specific strategy can work in a volatile market, for which we have brought you some top picks of large investors and brokerages, it is important to invest in sectors with bright prospects.

Dipen Shah of Kotak Securities on top stocks in the market
Over the last one year, the markets have been clearly biased towards sectors or companies that have low debt.

This is evident from the fact that between September 2010 and September 2011, the BSE consumer durables index (up 1.06% to 6,461), FMCG (up 5% to 4,010) and healthcare (down marginally 2% to 5,968) have outperformed the broader indices while the BSE realty index (down 51% to 1,863), power (down 33% to 2,225) and capital goods (down 33% to 10,843) have been the laggards.

RUNNING AHEAD
Raghavendra Reddy, vice president, private wealth, Ambit Capital, says, "Due to global uncertainty, investors should stay away from sectors such as metals and information technology which depend highly on demand from other countries. However, in the present scenario, an investor can buy auto stocks, especially of two-wheeler makers, and pharmaceutical companies."

Market experts say one must not invest in real estate, hotel and shipping stocks.

We bring you some sectors on which market experts believe you can bet in the present market conditions.

Infrastructure: Between January 3, 2011, and October 10, 2011, the NSE infrastructure index underperformed the Nifty by a big margin. It fell over 25%, or 868 points, to 2,589. Market experts say one can invest in infrastructure stocks once the RBI signals a cut in interest rates.

Gajendra Nagpal, chief executive officer, Unicon Financial Intermediaries, explains why. "Since the beginning of 2011, the sector has been under pressure due to rising interest rates, besides lack of new project announcements by the government."

R Murali Krishnan of Karvy Stock Broking on top stocks in the market
During the first nine months of 2011, 20 out of 25 stocks in the index have fallen. Of this, 17 have fallen in the range of 25-75%. The biggest loser, Lanco Infratech, fell 75% to Rs 15.

The only exceptions are Idea Cellular (up 42% to Rs 98), Mundra Port & Special Economic Zone (up 14% to Rs 164), Bharti Airtel (up 5.35% to Rs 378), Siemens (up 2.10% to Rs 837) and Power Grid (up 0.15% to Rs 98).

"Most infrastructure stocks are available at attractive valuations. You can invest in infrastructure stocks as they can give you a return of 40-50% in the medium to long run. You can start buying stocks of infrastructure companies after the RBI signals a cut in interest rates," says Nagpal.

Auto: Since the beginning of 2011 till October 10, the BSE auto index has fallen 18% to 8,420. Market experts say investors can buy stocks of heavy commercial vehicle (HCV) makers as well market leaders in the two-wheeler segment. However, there may be some more pain left for this rate-sensitive industry in the short run. This is because most vehicles are bought on loan and high interest rates make people postpone purchases.

Harendra Kumar, managing director, Elara Capital says, "Rate-sensitive stocks are likely to remain subdued for another quarter and we can expect some upward move after February 2012."

Vivek Mahajan of Aditya Birla Money on top stocks in the market
VK Vijaykumar, investment strategist, Geojit BNP Paribas Financial Services, says, "At present, most auto stocks are attractively priced, particularly in the HCV segment. One can buy HCV stocks for the long run only. We believe the interest rate cycle has peaked and may trend down from the first quarter of the calendar year 2012. This will change the fortunes of this industry for the better."

Between January and Sept-ember 2011, Tata Motors fell 40% to Rs 156, followed by Bharat Forge (29% to Rs 268), Maruti Suzuki (23% to Rs 1,083) and Ashok Leyland (18% to Rs 26). The two top two-wheeler makers fared slightly better than these companies. Bajaj Auto and Hero MotoCorp declined just 0.33% and 2.33% to Rs 1,536 and Rs 1,941, respectively.

"Two-wheeler stocks are fairly priced. Considering the growth prospects of the industry, these stocks, particularly of market leaders, can be considered," says VK Vijaykumar.

FMCG: Fast moving consumer goods (FMCG) stocks are considered as defensive bets in a falling market as companies in the sector are not hit much by high inflation and interest rates. This makes them less prone to volatility. Since the beginning of the calendar year till September 2011, the BSE FMCG index has risen 6.14% to 3,910.

Vinod Sharma, head, private banking and wealth management services, HDFC Securities, says, "In a volatile market, the stocks of FMCG and cosumer dur-able companies are considered storm shelters."

Harendra Kumar of Elara Capital on top stocks in the market
"Due to rising rural incomes and unstable market conditions, the FMCG sector is likely to outperform others for the next couple of quarters. ITC can be a good investment for the long term," he says.

However, Sandip Sabharwal, chief executive officer, PMS, Prabhudas Lilladher Group, says, "At present, there are several risks globally that can create sharp swings in the markets. Under current circumstances, a medium risk strategy is the best. Most defensive stocks are trading at extremely stretched valuations."

Pharmaceutical: India's pharmaceutical industry has, over the years, demonstrated its might. Some pharmaceutical companies get more than 50% turnover from exports.

The BSE healthcare index tumbled over 13% to 5,841 between December 31, 2010, and October 10, 2011. Except Divi'S Laboratories and Apollo Hospitals, all major pharmaceutical stocks are trading in the red. Divi'S Laboratories and Apollo Hospitals jumped 13% to Rs 732 and 10% to Rs 501, respectively. However, other majors such as Cipla, Piramal Healthcare and Ranbaxy Laboratories declined 24%, 25% and 14% to Rs 283, Rs 352 and Rs 517, respectively.

"At present valuations, in view of rupee depreciation and fears of global recession, this recession-proof export-oriented industry is likely to perform very well from the present levels," says VK Vijaykumar of Geojit BNP Paribas.

TAKING A CALL
So, what should be your investment strategy in the current situation? What would be the best way to position yourself in this uncertain market. Most experts say, and we also firmly believe, that investing in good stocks and having a long-term investment horizon will definitely create wealth over a period. Buying for the long term always works. This can be gauged from the fact that the key benchmark indices, such as Sensex and Nifty, have given an annualised return of 19.32% and 20.76%, respectively, in the last ten years.

As Parag Parikh, chairman, Parag Parikh Financial Advisory Services, says, "Retail investors need to understand that there are no short cuts to making money. That stock markets offer you instant get-rich-quick solutions is an illusion."

Ramesh Damani holds a similar view on investing. "Don't look for investment as a source of short-term returns," he says.

If you are still unable to time the market, market experts advise the systematic investment plan (SIP) route to ride through the volatility. "In the present market conditions, equity SIPs can be a good option," says Ambareesh Baliga, chief operating officer, Ways2Wealth Brokers.

Through direct investment or SIP, one should spare some portion of the portfolio for equity investments. There might be light peeking through this apparent gloom which might get brighter. As veteran investor Ramesh Damani says, a sunset is followed by a sunrise.

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