Has the Bull Returned to the Indian Stock Market?

The first 6 weeks of 2012 have been nothing short of AWESOME for the Indian Stock Markets. Since the Inception of the new year 2012, the Indian stock markets have grown by double digit %'s. A double digit growth in one year is considered great, but a double digit growth in less than two months? Thats great news isn't it?

This post is about, what caused this bull run and an outlook, as to whether the bull will continue to run amock or will it be Tamed by the All-Powerful Bear...

Shall we get down to business?

Note: All Numbers are as of Feb 15th 2012. The numbers may not match the live/current Market values.

How much have the Indices Gone up Exactly?

The Exact Numbers (In %) by which the various major Indices in India have gone up are as follows:

1. BSE Sensex - 18%
2. Nifty (NSE) - 20%
3. BSE Midcap - 26%
4. BSE Smallcap - 27%

What Caused this Sudden Bull Run?

Well, there are multiple reasons for this sudden (but, good) Bull Run. They are:

1. Foreign Institutional Investors (FIIs), who stayed away from the Indian Markets last year, made a triumphant return. Nearly 23,000 Crore Indian Rupees has been invested in the Indian Markets by the FII's in the first 6 weeks of 2012. This has been one of the key driving factors behind the bull run

2. Better Economic Data from the US and easing Euro-Zone debt worries have brought some relief to global investors. The Uncertainty towards the global economy has come down and the prospects of recovery/growth are looking bright

3. The Domestic Economic Scenario too has been very positive in this time period. The CRR Rate Cut in January, a possible rate cut in March, Stabilizing Inflation Rates, Good December Quarter End Results by Major company's etc have been contributing factors to the bull run

Will this Bull-Run continue?

Well, there is no clear-cut answer to this question. If my life depended on this question, my answer would be

"I think so. There is 70-30 kind of probability for the Bull to Continue Running and for the Bear to bring the Bull to a halt"

Nonetheless, the following factors may directly influence the continuation of the bull run or the return of the bear...

1. The Results of the Ongoing State Elections & the Union Budget that is expected in March will be key drivers to the Market Movement
2. The tensions between European countries & Iran over crude oil supplies may cause the crude oil prices to explode. If it happens, it may have a direct bearing on the Market
3. FII's have been net-buyers so far and their continued support or pull-back may have a significant effect on the Market

With the possible Greece Sovereign Default out of the way, the chances of any major global economic downturn are significantly low. The European Union seems to be on a road to recovery and the economic scenario in the US looks positive as well.

All said and done, the stock market can be expected to be volatile. There will be no clear-cut Bull Running Wild kind of scenario. Investors try to book profits whenever they see the markets move-up. So, such profit bookings may drag the market down in the short-term (A few days of downward movement). Even after such corrections, the market can be expected to get back on its feet and continue the upward movement.

So, all in all, the overall outlook for the Indian Stock Markets is positive over the next few months. The chances of any major/drastic market corrections (downfall) are low and the outlook & investor sentiment will continue to be positive.

How should we Invest in Such a Situation?

This again is an extremely tricky question. If you ask me, I would suggest the following:

Fixed Income Instruments: 60%
Equity Mutual Funds: Around 30%
Equity Shares (Direct Stock Holdings): 10% or less

Tracking the Market and identifying buy/sell timelines is very difficult in such volatile market scenario's. Unless you feel, you can enter or exit a stock at the right moment, I would suggest to take Equity Investments through the Mutual Fund Route. Afterall, experts are always better at this and most importantly, that is what they get paid for. Don't they?

Aren't you Curious to ask me, Why I suggested the above Investment Mix?

Well, any investment decision needs to have a Justification. The Justification for my decision (outlined above) are as follows:

1. The Interest Rates offered by Fixed Income instruments like Bank FD's, Bonds and Corporate FD's are in the double digit. On any given day, any returns of over 10% is very good and if the returns are guaranteed, then it is all the more better. That is why I have given a 60% weightage to debt instruments.
2. Equity Markets though will be positive, will also be choppy. Predicting the movement would be very tricky, even for experts. That is why I have given a less than 10% exposure to direct stock investments and a 30% to Mutual Funds. Picking a well performing Mutual Fund is half the battle won. The fund manager will fight the rest of the battle for you.

If you are wondering, what the best Mutual Funds would be, to Invest right now, just wait until the next post. The next article is going to be on the top performing Mutual Funds which you can invest in. To read that post Click Here


Happy Investing!!!

Rules to Invest in the Stock Market

The Stock Market has been an enigma to many investors over the past 2 years. We have seen the great highs of 21000 and we have dug deep down to the 7000 levels. The stock market movement is not rocket science but the perception of a majority of Indian investors is otherwise.

Markets move in a cycle, after every high there is a low and after every low there is growth and a subsequent high. But, we feel that the market is unidirectional. If the market is going up (in a bull run) we expect it to run indefinitely and if it is going down (in a bear run) we expect it to stay down forever. Let us take an example that happened recently. Two months back the markets were hovering around the 21000 levels and everyone was full of positive news that the markets will touch 23000 by year end or by next year. The bubble burst within days and it crashed an average of 300 to 400 points every day and went back to the 18000 levels. Again people started correlating bombings in Korea and said that the markets would stay down. Again surprises galore and within a few more weeks the market is back in the 20000 levels.

The Market is never going to grow tired of throwing surprises which effectively means that the best and the most knowledgeable market gurus need to pay attention and watch out for it.

Amidst all this commotion, the market has taught us a few very valuable lessons that we need to remember. It would be good if we keep these lessons in mind and be a prudent investor to avoid burning our fingers.

Rule 1: Always Stay Cautious

There is a saying in physics, what goes up has to come down, that is gravity. Stock markets aren’t proficient in physics and they don't really follow the laws of gravity. People feel that if there is a steep growth in the market values, they feel correction will eventually happen and the story other way round is true to a certain extent as well. So the best approach is to stay cautious when people are acting out of impulse.

At the current levels, the Indian economy is definitely healthy and in a much better shape than its world counterparts, however when the market goes up to new heights despite similar fundamental valuations, it definitely means that we need to exercise caution before jumping into the bandwagon.

The Lesson here is: Stay cautious and do get carried away by the market movements irrespective of the direction in which it is moving.


Rule 2: Forget the Herd Mentality

Though almost all of us (stock market investors) are decently educated and are civilized, a majority of us still follow the herd mentality. Have you seen a herd of cattle walking about in barren land? The first cow is walking because the owner is dragging it but the rest are following just because the cow in front of it is moving ahead. This is exactly what majority of us do. “Follow the Herd”

I am not saying that we must always stay unique and do the contra but still, we shouldn't be doing something just because everyone around us is doing it. When the markets crashed, some people panicked and started selling their holdings. This triggered further panic and everyone jumped on the sell flock and the market tumbled. Did the basic fundamentals of the companies change? NO. Did the companies go bankrupt? NO. Did news say that certain companies are making losses? NO. The answer will be a whole bunch of No’s to all possible questions that might trigger us to sell a stock. But still, we all sold our holdings and the market plummeted.

The lesson here is: Don't follow the herd. Do your research and stay invested. Don't sell just because people around you are doing it.

Rule 3: Book Profits Systematically

Though the rule is simple, this is probably the most difficult one to follow. When a company stock is going high all of us are tempted to say this “Just a little bit more and I will sell and make a good profit”. Haven’t we all been in this shoe? Definitely we have. But unfortunately, this approach rarely works. It is always advisable to exit from the market in phases. When we buy a stock, it is good to chart out a future course of action based on market movement. We must plan to sell a % of our holdings in the company when it reaches a certain level. This not only helps us to reduce risk but also provides us with an opportunity if the market moves on further. In the whole greed of a just a little bit more, many of us often lose all our holdings and sometimes even get into red.

The Lesson here is: Decide how much growth a stocks price can make over the next few months and decide a target. If the stock reaches the target, book partial or full profit so that, in case the stock tumbles, you don't end up with a full red portfolio.

Rule 4: Stay Away from Penny Stocks

We are all attracted to Penny Stocks. These stocks cost us around Rs. 10 or 20 each and even a small investor can afford hundreds of thousands of shares. Some of them even blow the roof and grow at over 50 or 60% in a matter of days. However, such rises may be purely based on rumors or speculations and they may lack sound fundamentals or financials. Every time you will see that a penny stock which was a hot pick during a bull run, will be nowhere to see when the markets go bust. In fact, these are the ones that go down first and some may even shut down their businesses.

The Lesson here is: Stay away from penny stocks. It is better to buy the shares of a good company with solid fundamentals at Rs.1000 than buy 100 shares of a tom-dick-n-harry company at Rs.10 each.

Rule 5: Forget Fear and Greed

Fear and Greed are two things that determine the way we act or react. When the markets were at the 21000 levels, everyone was sure that it would keep moving northwards, however when the decline started when least expected, panic selling occurred and the market fell terribly.

Fear and greed always have an upper hand in markets, during bull run markets are driven 70% by greed and 30% by fear whereas the same is reverse in case of bear phase. A contrarian strategy always helps, when people are fearful that the markets will come down be greedy to grab the stocks at a particular price, when people are greedy that the markets will climb further be fearful and start exiting from the markets.

The Lesson here is: Don't be afraid of making losses. Every person who claims he is a stock market guru would have incurred losses at some point of his life. The trick is to avoid greed and make wise decisions that can bring profit to us.

Rule 6: Don't forget Debt

Almost every stock market expert would say – “Keep a portion of your investment in debt instruments like band deposits or bonds” Yes you read me right. Debt is a very important asset class. It gives us the cash cushion that we always need and also gives our portfolio its much needed diversification. All wise investors know that they mustn’t put all their eggs in the same basket.

The Lesson here is: Have a diversified portfolio and don't forget debt instruments. You may end up with lesser profits than your counterparts during a bull run but you will be the happiest man of the lot during a bear phase or a market crash.

To Conclude:

Am not trying to be spoil sport about the market going to new heights and nor am I suggesting that the market will go down again. All I am saying is, it is better safe than sorry. After all, its our hard earned money isn’t it…

Happy Investing!!!

Will the Indian Market Sustain this Momentum?

This is a million or rather a billion dollar question. Everyone including you and me is surprised over the fact that the Indian stock market is strongly growing and the BSE is currently trading at an all time high of around 21000 points. This is indeed excellent news for all investors across the globe; who have invested in the stock markets in India. But happiness isn’t the only thing that’s on everyone’s minds. Caution or skepticism is also abundant among knowledgeable investors. The purpose of this article is multifold and will cover the status of the global and Indian markets, the outlook for the next few months. Lets get started!!!

Status of the global markets over the past month

The global markets in the USA, UK, China etc have been growing slowly but steadily over the past month on the back of improved economic news. Recent news suggests that the slowdown phase is probably over and policymakers across the globe have started to ease up on the tightening measures to aid this growth. Europe has been encouraging on the economic front and their policy towards the same has only fuelled further growth. Good manufacturing data is coming in from the US, China etc which suggest that the double dip recession maybe receding. US Consumer spending has increased significantly in the last quarter and the weekly jobless claims have also fallen, which is evident in the stock markets numbers.

The US Markets posted a net growth of around 5% in the numbers at the end of the month when compared to where it was at the beginning of the same. Similarly the European markets posted a growth of around 3% and the asian markets around 5%.

Overall the market outlook as a whole looks positive as well as promising.

Status of the Indian Market over the past month

The Indian stock market began on a positive note and has shown solid progress over the past month. The stock market is currently trading at the 21000 levels which is where it was a couple of years back before the global meltdown happened. Strong global cues, good or rather great Q2 advance tax payments by corporates and companies and sustained buying by FII’s boosted the sentiments of the Indian investors. FII’s have made investments of more than $5 billion over the past one month. The repo rate has been hiked 0.25% and has gone up to 6% and the reverse repo rate has gone up by 50 basis points to 5%. New policy decisions from the government of india about the reduction of corporate taxes helped sustain the growth of the markets.

The local markets posted solid gains of around 10% over the past month which is much higher than the growths posted by the US or the Euro markets.

Will the Indian markets be able to sustain the momentum?

If we compare india with its other emerging market peers, the Indian markets’ valuations are fair and justified though they are at a slight premium. Though our economy is sensitive to global shocks, india is a highly domestic-driven economy unlike our peers China or Brazil who are more dependent on exports and rely on the commodity markets for their GDP growth/expansion. This distinguishing factor will be greatly reflected in the equity valuations in our stock markets. Therefore, our markets will continue to attract a large share of FII inflows when compared to its peers.

The high domestic demand is the reason why, india was the first to recover from the slowdown. Though we have a solid export contribution to our GDP, the local or domestic demand contributes an even higher number and hence the earlier recovery.

Your next question is going to be – How long will this Rally continue?

Predicting the market especially one like the Indian market where liquidity is one of the important trend determining factors is extremely difficult. Even experts have burnt their fingers with their suggestions/recommendations. Coming back to the topic, liquidity flows will strongly determine the direction of the market, especially the flows from the FIIs. Also, the doubts about the US getting into a second recession or avoiding the same will determine the global equity flows. As for now, the global economic situation looks stable and we can expect the markets to perform strongly for the next few months.

Financial Industry, Capital Goods, Infrastructure, Power, Media, Hotels and Pharma can be expected to outperform the market. Whereas Automobiles, Consumer durables and a few of the banking stocks might underperform the market.

What Strategy should a small investor follow now?

This is by far the most trickiest question given the current scenario. In my personal opinion, small investors should invest only in large or big midcap companies with a sound management and fundamentals. Stay away from small caps or penny stocks that you do not know much about. Buy on dips would be a good strategy.

Pick out a good company and start buying in small portions everytime you see that the price is correcting or coming down by a decent number.

Overall, the market sounds positive and investing in good companies for the long term would definitely prove beneficial to all investors.

Happy Investing!!!