Three biggest dangers to your stocks - The 5 Minute WrapUp by Equitymaster
Free Reports

Three biggest dangers to your stocks

Jan 31, 2011

In this issue:
» Egyptian crisis shakes up the oil market
» Opportunity in gold just got better
» Two big threats facing the Indian IT companies
» What worries foreigners most about India? It's not corruption!
» ...and more!!


------------------- Last Chance To Crash Proof Your Portfolio -------------------
Are you ready for a stock market crash? Do you have the list of stocks you should get rid of right away? Well, you can get immediate access to this list... provided you respond before 5 PM today. Quick! Click here for full details...
-------------------------

00:00
 
Indian markets have been on a correction phase lately. Stocks, even the blue-chips, have fallen considerably from the highs of October 2010. The BSE-Sensex has lost almost 11% in the first twenty trading days of 2011. The index has in fact lost around 76% of the gains that it had made in the whole of 2010. So, overall, there is a sense of despair amongst those who have remained invested over the past few months. There's also caution in the way investors are treading their way with respect to their investments.

We believe there are three core reasons that have caused this fear in the markets. The bad part is that these fears are for real and are set to impact stock prices in the near future as well.

The first of these reasons is high inflation in the country, which has been caused by rising prices of food, oil, and other industrial commodities. The second fear is that even the economic growth is showing some signs of stumbling. This was made clear by the industrial growth numbers that were released a couple of weeks earlier. And the third reason has been the stock markets' own high valuations, which have now come down a little bit.

We see the first two concerns - rising inflation and slowing economy - as big dangers for stock prices in the near term. As for the valuations, the good thing is that these are coming down thus making stocks cheaper than what they were in October.

What do you say? Which out of inflation, economy, and valuations do you consider the biggest threat to your stock portfolio? Share with us or post your view on our Facebook page.

01:05
 Chart of the day
 
Today's chart shows the amount of losses that some sectoral indices have seen in 2011, which have erased the gains made in the whole of 2010. The worst performer has been the BSE-Oil & Gas sector, which has lost 9.5 times the gains it had made in 2010. Then comes the BSE-Metals index that has lost 7.7 times the 2010 gains. The BSE-Sensex has lost 0.69 or 69% of its 2010 gains in just the first month of this year. And as we see now, the weakness for Indian stocks is not likely to go off anytime soon.

Data Source: CMIE Prowess; CG-Capital Goods

01:29
 
Anyways, the weakness in Indian stock markets continued this week as well. The BSE-Sensex was trading down by around 240 points (1.3%) at the time of writing this. Today's losses were led by stocks from the realty and IT sectors. Other key Asian markets also closed weak. While Hong Kong was down 0.7%, Japan closed weaker by 1.2%.

01:43
 
Egypt is in the midst of a political coup. Its President Hosni Mubarak has attempted to hold on to power by firing his cabinet, but not himself. This has led to widespread protests within the nation. Severe opposition to this coup has also come from across the world. The Egyptian crisis is bound to have a global consequence.

The first impact has already been seen on crude oil prices that have surged in response to this crisis that has shaken the entire Middle East, the leading region for oil production in the world. While the impact is likely to be near term, as protests in Egypt are likely to have a positive long-term impact on Middle Eastern politics and governance, if the situation were to get worse, it would have a tremendous negative impact on crude oil. And subsequently on oil guzzling countries, India included.

02:17
 
Gold had a dizzying outing in 2010. Prices surged 30% and caused many Indians to temporarily halt their gold purchases. Little wonder then that with gold prices having corrected a bit in January of this year, Indians are back to buying this precious metal. But the buying is being done in small quantities as many still expect prices to fall further. Given the way gold prices rose in 2010, a correction in the yellow metal was long overdue.

Hence, dips in gold prices should be looked upon as an opportunity to buy more of this metal. Indeed, the demand for gold is still buoyant on account of better farm incomes and more money in the hands of urban consumers. This means that further fall in prices will certainly act as an inducement to buy more!

02:49
 
Here's a double whammy for Indian IT! According to the head honchos of TCS and Infosys, inflation and the European crisis are the major threats for the Indian IT sector. The debt crisis and sovereign defaults in the Euro zone are still affecting clients. This will in turn lead to sluggish growth for these IT bigwigs. The only solution against this is for the companies to spread their wings further across the globe. They are also trying to aggressively push into new virtual areas like cloud computing. This will help mitigate any geographical risks as information can be accessed via the web or mobiles from remote data centers.

Another worrisome factor is inflation. For big IT firms, which each have over 100,000 employees, increased wage rates are likely to have a huge impact on operating costs. These companies have already increased employee pay packages. But, they also need to hire thousands of staff for their new initiatives. Rising prices also cause production costs to increase, further impacting margins.

03:28
 
If you were to be asked as to what bothered you more - corruption or inflation, what would be your answer? For most Indians, it would be inflation. Because when it hurts, it shows. Whereas corruption exists like a quiet thief, hurting in ways not very direct and assessable. And more so, corruption has taken the form of a cultural trait rather than an intolerable crime.

But this may surprise you. It surprised India's business leaders and political leaders too who attended the World Economic Forum recently. As it turned out, the global peers displayed more concerns about inflation than corruption and the so-called government deficit. This underlines the fact that the world views corruption as an inescapable part of doing business in the country. Just like the common man in India who takes the corruption punch on the chin and gets on with life.

But they did express their wariness towards the inflation issue. Several sessions saw speakers raise concerns about rising inflation, which is seen as one of the biggest threats to India's growth story.

04:11
 
P-Notes or participatory notes were once known as the visa for unscrupulous FII investments into Indian stock markets. However the market regulator SEBI clamped down on them in late 2007. This tightened the issue of these instruments. So much so that both SEBI and the RBI count the considerable fall in P-Note investments among their achievements. As per SEBI, P-Notes as a percentage of FII AUM now comprise just 16% as against a peak of 51% in 2007. Important to note that the drop in P-Notes' popularity came in primarily after the SEBI issued stricter KYC guidelines for them. Therefore it is easy to conclude that the so called FII investors wished to keep their identity unknown. However, this does not mean that foreign interest in Indian stocks has waned.

Despite the absence of such opaque instruments, FII inflows into the secondary markets were to the tune of US$ 29 bn last year. Number of FIIs registered with SEBI is also up 53% since 2007. Thus P-Notes or no P-Notes, the lure of returns from Indian stocks will continue to attract overseas money to Indian shores.

04:57
 Today's investing mantra
"It's not always easy to do what's not popular, but that's where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized." - John Neff

Today's Premium Edition.

Recent Articles

These Are the Stocks to Buy Before the Market Goes Up December 14, 2018
The state election results and the resignation of RBI governor, Urjit Patel, has made the market nervous. It is exactly in times like these, you can get to buy the best quality safe stocks at the right prices.
Seven Election-Proof Stocks to Buy Now December 13, 2018
In volatile times like these in the run up to the 2019 elections, which should you look at?
A Safe Stock Portfolio for These Uncertain Times December 12, 2018
Blue-chip stocks offer stability, safety, and a long track record of proven execution. That's why large-cap companies dominated our mock portfolio.
Today is a Great Day to Buy These 7 High Quality Safe Stocks December 11, 2018
The state election results and the resignation of RBI governor, Urjit Patel, has made the market nervous. It is exactly in times like these, you can get to buy the best quality safe stocks at the right prices.

Equitymaster requests your view! Post a comment on "Three biggest dangers to your stocks". Click here!

21 Responses to "Three biggest dangers to your stocks"

KRUNAL

Jan 31, 2011

Inflation

Like 

madan mohan jain

Jan 31, 2011

THIS IS ALL MONEY GAME HONEY.FII CAME TO INDIA WITH .25% INT. FROM USA ,MADE HANDSOME PROFIT WITH THE HELP OF POLITICIANS ,MEDIA (FIN.NEWS CHANNELS)& REGULTRS. & NOW THEY ARE GOING BACK WITH HANDSOME RETURN.THEY WILL COME BACK AGAIN WHEN THEY WILL FELL SO & WILL MAKE INDIAN INVTSRS FOOL AGAIN AND THIS WILL KEEP ON.MKT HAS NO FUNDMTLS.

Like 

PRVRAJAN

Jan 31, 2011

Yr Article on P Notes proves onething as the many investors have been thinking. The foreign money which tooup the market suddenly from 5300 tpo 6350 (nify)
is nothing but stashed away money and not reall FII investments that is very HOT money. The scams scarred them to withdraw that and what market is today. Now investors have to really watch what real FIIs are going to do. Will they stay and book their hefty returns and go back to improving economies elsehwere.

Like 

COL SISIR KUMAR MISRA

Jan 31, 2011

DEAR SIR

THE BIGGEST THREAT TO STOCK PRICE ARE INFLATION, SLOW ECONOMIC GROWTH, SCAMS, HIGHER CRUDE OIL PRICE, FII'S TAKING OUT THEIR MONEY FROM THE STOCK MARKET, WEAK SENTIMENT, MUTUAL FUND COMPANIES ARE SITTING ON HUGE CASH & RELUCTANT TO ENTER CAPITAL MARKET, RETAIL INVESTORS ARE NOT PARTICIPATING BECAUSE OF FEAR OF LOSING THEIR HARD EARNED MONEY. BOTTOM LINE OF LARGE, MID & SMALL CAP COMPANIES IS IMPACTED BY HUGE SALARY, PERKS & PRIVILAGES TO TOP BOSSES LIKE CEO, MD & CFO ETC. MOST OF THE COMPANIES ARE INTERESTED TO REWARD THEIR TOP BOSSES & NOT THE INVESTORS WHO HAVE PUT IN THEIR HARD EARNED MONEY IN GOOD FAITH.

OUR POLITICAL LEADERS HAVE ALWAYS BEEN REACTIVE & NOT PROACTIVE.THEY NEVER LEARN LESSONS FROM THE HISTORY.

COL SISIR KUMAR MISRA











Like 

Kirti

Jan 31, 2011

According to my analysis, through logic system and pendulum dowsing system, the causes of the current behavior of the stocks in India are as follows: in brackets is the value in percent being the effect on the Indian stock exchanges.

1] Global recession [10%]

2] Inflation in India [10%]

3] Foreign Institution's Net Withdrawn [50%]

4] Reduction in net savings due to inflation etc [20]

5] Other miscellenus factors [10%]

END...............................

Like 

sharetipsinfo

Jan 31, 2011

Strategic share market trading always results in good profit. Share market traders should focus on research not on speculation

Like 

Agnel Pereira

Jan 31, 2011

You have stated P-Notes as promissory notes which is incorrect. It should be Participatory Notes.
Secondly, about inflation and corruption; if what you have written is true (about the WEF at Davos) then its really sad. I am more worried about corruption than inflation because the former is deep rooted in our policy and economy whereas inflation is a shorter term phenomena that can be managed or brought down. However I am not surprised the world leaders are not bothered about corruption - since every one of them indulge in it to build Swiss bank accounts or invest indirectly through non residents' businesses abroad.

Like 

Ramdas buche

Jan 31, 2011

very realistic analysis.

Like 

Rsdheshyam Sharma

Jan 31, 2011

If you were to be asked as to what bothered you more - corruption or inflation, what would be your answer? For most Indians, it would be inflation. Because when it hurts, it shows. Whereas corruption exists like a quiet thief, hurting in ways not very direct and assessable. And more so, corruption has taken the form of a cultural trait rather than an intolerable crime.

Regarding the above, the leaders have missed out the third problem which is the cause of both corruption and inflation and that is population.
None of our leaders seem to be taking the matter seriously when they should realize that all our problems are being caused by population, both internal and cross border infiltration

Like 

venkatesan

Jan 31, 2011

Not any of those. The most dangerous is corruption. Courruption at all levels increases the cost which in turn will lead to all kinds of danger to the economy. The high inflation is due to short supply. The short supply is due to many non-performances. To match our expectation, the government has to spend more but little get to the reality. Hence, we need to eradicate the corruption from every individual mind for a country to prosper which in turn will keep the valuations and economy healthy.

Like 
<<Prev    Next>>
Equitymaster requests your view! Post a comment on "Three biggest dangers to your stocks". Click here!