CY2008 -Path ahead...

The year 2007, offered near 50% returns to the investors in Indian equity markets. End 2006, the brokers came out with their outlook for CY2007. Some of them having global parentage went out saying the year would be of negative returns. Some talked of moderate returns to the tune of 15-20%. However the market took every expert by surprise. For those who remained invested in the equities markets, it turned out to be a real bonanza.

Though the earnings CAGR remained in line with the expectations and in some sectors actually surpassed the estimates, there are factors that came to surface which made this run an outcome of more of the liquidity and less of the fundamentals. When most of the analysts agreed that the indices are more than fairly valued, the indices were moving on the back of liquidity.

The slowdown in US, quality of Chinese earnings and stretched valuations made a huge amount of money entering Indian capital markets from developed markets. A cool US $ 16 billion entered Indian markets. This money has primarily entered the front run counters of Indian bourses. In the last couple of months, especially after the participatory notes issue the money has started moving out of Indian markets.

Though the FII numbers are still looking great, the things are not really enticing any more for the guys who understand the game or selling at every high and booking profit. Forget technical and fundamentals, most of the investors would agree that the sensex is hovering around the same levels where it was just before the ban on participatory notes.

But the things are gone by. And one should be more focused on future than anything else. After all, the markets work on discounting of future. This year most of the brokers are estimating the sensex to be in the range of 22000-24000, implying an upward movement of 7% to 17%. This year, also most of the brokerages are talking moderate returns. Most of the outlooks talk about the corporate earnings to be the key driver of sensex and the corporate growth is estimated to be around 20% supporting the forward P/E multiple of 21.

The key risks that everybody is discounting include rising crude oil, rising rupee and the political scenario in India post Gujarat. The geo political tension in Indian subcontinent, to be precise in Pakistan can disturb the things in the times to come, especially if there is a weak government in center. Ahead of elections, one can expect a lot of freebies for many sectors and many weaker, to be precise, politically sensitive, sections of the society taking its toll on the government coffers and also slow down of reforms process.

The crude oil prices are expected to remain firm despite a slow down in USA, thanks to the booming demand in China and India. The commodity as an asset class is expected to post good performance in CY2008, and hence an exposure to this asset class is warranted.

Gold is one asset class which is expected to post good numbers this year again though on a larger base. However ferrous and non-metals metals are expected to remain the center of activity in the commodity space.

The interest rate in India is due for a downward journey. The obvious beneficiaries are the long term debt funds and the income funds. One can invest good amount of money in those funds which she has earned in the equity markets. A 12% CAGR over next couple of years over the next 18-24 months cannot be ruled out, though this can appear to be a contrarian bet.

Interest rates’ downward movement is expected to benefit to banking, real estate and auto sectors, popularly known as interest rate sensitives. However investors must be selective while investing. Blanket approach can fetch negative surprises.

Few strategies for those who are already invested big sums in the market. Big sums need not be multi crore portfolios. Big sums means a significant amount of your networth, it can be even a couple of lacs.

The market in the last two weeks is range bound when it comes to the frontline stocks. The mid and small caps have moved significantly. Here most of the investors are retail investors. Shenanigans are active in these counters, popularly known as operators. There are instances observed that the stock calls given on relatively small cap illiquid counter are attracting circuit filters. Even the MNC counters are hitting upper circuits just because the global CEO is visiting India. The small and unheard companies are bought as tomorrow Reliance and Infosys. The sanity is vanishing from the market and the investors are acting in heard mentality.

The 52 week high and low data published in most of the leading financial dailies clearly indicate that the number of stocks at the 52 week high are increasing and the number of stocks at 52 week low is bare minimum. Same is the case with stocks in upper and lower circuits. The euphoria is very much in. at such moment of time; it is apt to move out of speculative positions and leverages. The speculation coupled with leverage is a lethal combination and can take your portfolio both ways - upwards and downwards. Do check out if your portfolio is unduly skewed towards a particular sector, a particular promoter group or a particular company. Nobody here will keep winning till eternity.

If you are a ULIP investor and paying your premium on annual mode, change your mode to monthly mode. Most of the insurance purchase takes place between January and March. Hence it is the right time that you approach your advisor at the earliest possible and change premium paying mode to monthly. For those who intend to invest in mutual funds big sums, go for systematic investment plan. Also as per the recent announcement, direct investments in mutual funds will not earn entry loads. This is a great measure by SEBI and do consider opting for it.

Things may look too rosy now. But it is high time that you take a note of the thorns under cover.