What to buy when the markets correct?

Jan 18, 2010

In this issue:
» What can lower Indian markets' dependence on FIIs
» Why is Jim Rogers hot on commodities?
» IEA expects oil demand to recover in 2010
» PSU divestment to get clarity by March
» ...and more!!

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As we talked in the last issue of the 5 Min., a correction in stock prices must be expected (and not feared) in 2010. And from the several comments that we've received for that issue, it is clear that investors are waiting for a correction to invest.

So if you are also one of those, and are expecting stocks to correct, what are you doing now? What about preparing a watch list of stocks you'd buy once the correction really happens?

Indian markets have made a huge recovery from their March 2009 lows. While we don't think they're anywhere near bubble territory, good values have become harder to find. Does that mean you should stop researching for new stock ideas? Not really!

What you rather need to do is make a list of good quality stocks - ones with good operating margins and return on equity, manageable debt levels, strong growth prospects, and selling expensive. In other words, you must prepare a list of strong companies worth buying if the markets crack.

One of the fundamental rules of investing is that even great companies, if bought at high valuations, don't always make great investments. Take Infosys' case. The company has multiplied profits 20 times over the past ten years. But the stock has gained just around 2.5 times during this period. That's because investors were paying too much for the company's prospects during the dot-com bubble.

It's very important to buy great companies only at the right prices. The next correction can give you that opportunity. Are you preparing yourself with a good watch list?

 Chart of the day
Today's chart of the day carries from the idea in the last issue about central banks' holding of gold as part of their forex reserves. Today's chart shows the proportion of gold India's RBI has been holding over past ten years. While the holding did not change much during the period FY04 and FY09, it spiked during FY10 as the RBI bought around 200 tonnes of gold from the IMF.

Data Source: RBI

Even after so many years into existence, Indian stock markets are still largely driven by FII sentiment. And this tends to hurt sometimes, and hurt big. Take the case of the recent financial crisis. India's fundamentals were far better than the developed world. And still its stock markets came in the firing line. Needless to say, FIIs did not figure out India's fundamentals properly. And it was mostly the smaller investors who paid the price for it. This may not be an isolated case though. Similar situations would play themselves out again and again as long as FIIs remain kingmakers.

An article in Financial Times has perhaps a solution to this problem. It correctly argues that the time has come for India to kick-start a process whereby equity mutual funds could overtake bank deposits in a few years time. Since India has a very high savings rate, the gush of liquidity that would flow into the equities as a result of this transition would certainly make the Indian middle class and not FIIs the primary drivers of the market.

Plus, we also have the benefit of learning from the experience of countries like US as to what the best and worst practices could be and hence, make the entire exercise even more beneficial to investors. As the article rightly concludes, there are indeed risks, but even the prize, if we could avoid western mistakes, would be great. And only then, the Indian stock markets could be called as wealth creators in the true sense of the word.

Anyways, Indian markets had a strong start to this week. The BSE-Sensex was trading 75 points (0.3%) up at the time of writing. Mid and small-caps also had their day in the sun. Indian markets were in fact the best performers across Asia. Other gainers included China (up 0.4%) and Singapore (up 0.3%). European markets have started on a mixed note.

After last week's fall, gold prices have started this week on a positive note. An ounce of the yellow metal is currently trading at US$ 1,134 an ounce, up by US$ 4 over last Friday's close.

One of the biggest economic worries going forward is inflation. Simply put, the huge amount of cash that has been pumped into the economic system will chase all asset classes. And this includes commodities. Add to that, the economic recovery has meant the demand for basic commodities is recovering rapidly.

As per the International Energy Agency (IEA), global oil demand this year will reach the highest level since 2007. After falling for the last two years, consumption will be expected to rise to 86.3 m barrels per day. We are not surprised about predictions of higher crude oil demand. The lifestyle of the developed world is dependent on crude oil. And emerging nations are also on their way towards that lifestyle!

Data Source: BP; Note: 2010 demand forecast is from IEA

Investors are keen to know where various economies are headed. The quality and substance of the economic recovery in major countries around the world is a much debated topic. And justifiably so! After all, the performance of one's investments depends on the same in a big way over the short term.

But there is one discerning investor who has carefully chosen an asset class that will perform well in either scenario. This class of assets, according to him, will perform well if economies recover, and will also perform well if they don't!

The asset class is commodities and the investor is none other than Jim Rogers. According to him, stock markets are up a lot in all emerging markets including India. Thus he is not investing in them currently, but is in fact just sitting and watching how things are panning out.

But Rogers' attitude towards commodities tells a different story. In his words, "The way I am playing is mainly with commodities because if the world gets better they will get better and if the world economy doesn't get better then most stock markets are going to suffer. It's not necessarily true of commodities, if the world economy does not get better. In fact if the world economy does not get better they are probably going to print even more money. Hence, commodities will be the place to be."

Pretty convincing argument, isn't it?

India's PSU divestment picture will get clearer by March. This is if one were to go by the words of Sunil Mitra, the disinvestment secretary. In an interview with a business channel earlier today, Mr. Mitra clarified that the government will first focus on listing unlisted profit-making companies.

Anyways, one of his statements that was intriguing was - "Availability of good-quality stock in the market will mop up some of the surplus liquidity, which is presently available and which will therefore help in stabilization of markets."

Well, while some PSUs that are on the block might be good companies. But whether they'll be good stocks (valuation wise) is what investors need to decide. Not the government!

 Today's investing mantra
"There's no reason we should become fearful if a stock goes down. If a stock goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month." - Warren Buffett, 2008 Berkshire Hathaway shareholders meeting

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18 Responses to "What to buy when the markets correct?"


Jan 18, 2010

If you provide the list of stocks to be bought to the members, it will be very handy and very helpful.


Shachi Mathur

Jan 18, 2010

Which equity I buy when markets correct and during
divestment of India PSU.


amit dangi

Jan 18, 2010

Pleaseeeeeeeeee tell me the way to unsubscribe.


Dipak udshi

Jan 18, 2010

Todays Money mantra is very Good. While selecting the script we should be very cautious. Select the share with prooven record, bright future and dynemic managemment and good scenario of the particular industry, of course the price of the share is also very important. Overall article is very Good.


Eswar Santhosh

Jan 18, 2010

1) I do not have a buy list yet. But, I have a sell list. Unless there is a severe correction, I do not think many stocks will come to attractive valuations I like.

So yes! one can keep a watch-list, but whether it turns into a bought-list depends on "how" correction occurs.

2) I disagree with the statement "FIIs did not figure out India's fundamentals properly". When you are in deep distress and are in dire need of funds from whatever sources you have, you will not think beyond the short term. Survival, IMHO was the primary need. But, a few FIIs were also at the other end of the block deal?



Jan 18, 2010

The reference in today's wrapup to the article in the Financial Times which unambiguously points out, 'the time has come for India to kick-start a process whereby equity mutual funds could overtake bank deposits in a few years time', seems to suggest the good option available to make the Indian middle-class investors primary drivers of the market replacing the FIIs who are presently occupying that seat.


Rustom D

Jan 18, 2010

Those who have seen hoe Oil has pushed the world to the brink are still not learning. Gambling in commodities is not lucrative its a crime against humanity. With rising populations consuming dwindling resources the prices will rise. But dont forget its the poor who will suffer. And according to Natures Law of Karma the balance will be restored only by large drops in population, large vanishing of huge tracts of land which will surely include those populated by these not only greedy but heartless gamblers.

Are YOU convinced about this ?



Jan 18, 2010

dear sirs, i appreciate your suggestion to your readers to prepare a watchlist of stocks to buy when a correction takes place. As a subscriber to your stock select i would be thankful if you can provide a list of such companies wherefrom we can select a few for investing according to our investment capacity / risk profile.
thanking you,

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