Friday, 13 December 2013

Market Perspective For Retail Investors

Recently the Indian markets touched record high levels and the mood in the markets was jubilant. With the Sensex and Nifty near their peaks, there is a wide speculation about the direction the markets will take in the future and what it means for the retail investors.

It is to be noted that the benchmark indices (Sensex and Nifty) were able to attain record high levels of the last three years (Nifty crossed 6300 & Sensex crossed 21000 in Oct’13) but have not given returns in the past six years and have not been able to beat inflation which has grown 70% in the same period.

Some Economic Factors :

There has been talk of the economy bottoming out and signs of recovery in the recent past, but last six-months macro factors have not indicated any decisive turnaround still. We look at some of the macro factors and how they have changed :
  • GDP has shown moderate expansion in Q2 of FY13-14 with a figure of 4.8% as against 4.4% in Q1.
  • CAD has seen a sharp drop to 1.2% of GDP in Q2. This was due to a sharp decline in gold imports and boost in exports which was helped due to rupee depreciation in major part.
  • The core sector industries have shown a growth of 2.6% in APR-OCT 2013. But this is far less compared to the figure of 6.8% corresponding to the same period last year. With a weightage of 38% in IIP, such paltry growth is an indicator of the persisting sluggishness in the economic activity. IIP for APR-SEP 2013 stands at 0.4% vs 0.1% for the corresponding period in the previous year
  • The inflation numbers have been consistently higher with the latest CPI inflation being at a 7 month high figure of 10.09% for October with the food inflation with a weightage of 50%-60% being the major contributor. The Govt. and RBI have been waging an unrelenting war against inflation but with no noticeable effect so far.
Except the GDP figures (which is still below 5% compared to 9.3% in 2010-11) and the sharp drop in the CAD, the other factors do not give any significant indications pointing to a turnaround. We need to watch data of the coming quarters too, in order to get a clearer picture.

The Election Bandwagon :

The economic factors pointed above are now being completely overshadowed by the upcoming elections. The shape and form of the post-poll government will have an all-encompassing effect on the economy and can be predicted only after the process of election is completed. The present rally being witnessed can at-best be said to be a pre-election rally by a market which anticipates a favourable change of guard at the centre.

Points To Note For Retail Investors :

  • The underlying economy has still not changed significantly even though the markets are going through an on-and-off mode.
  • the higher yields of the 10yr G-sec bonds and continuing tighter monetary policy do not signal any revival. There is no improvement in consumption led demand as yet.
  • The indices are on a high led by a highly polarised market which do not reflect the underlying picture correctly. The IT and Pharma sectors are getting more attractive valuations due to their export-oriented nature and FMCG due to the expected rural demand. The other sectors are presently not attracting any high valuations due to their cyclical nature. Cyclicals are the first to feel the heat during an economic low, but are the first preferred in a reviving economy.
  • The present polarised state of markets is purely reflecting the likes and dislikes towards individual stocks/sectors and is not a broad based participation.
Equity market is a future oriented product which has a non-linear behaviour unlike risk-free debt instrument. While equity portfolio building does not require any time-specific entry, it requires farsightedness and ability to judge the hidden value of investments as an opportunist. It has been generally seen that the retail investor is a late entrant in the market when the valuations are already sky high or is keeping away from the market when the opportunity for value buying presents itself.

The hype presently created around the high levels of the indices easily misguide the retail investors.

The winners in this investment game will be only those who keep in mind the underlying economic situation and the cyclical sector valuation opportunity for value investing which should be the guiding force in building an investment portfolio now. Having said that, overvalued sectors like IT and Pharma still have value investment opportunities except the large cap blue-chip companies. Investors should be very choosy in selecting good stocks for long-term investments.

This post was originally published in The Indian Republic at the following link : Click Here.