Markets are correcting. What to do?

Feb 8, 2010

In this issue:
» India Inc.'s sales on the mend
» India IT stocks are shining, but then...
» Why is Marc Faber backing precious metals?
» Get ready for a US$ 200 a barrel oil
» ...and more!!

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A double dip depression in the US. A bubble economy in China. Yet, India is said to be one of the fastest growing economies of the world. Don't you want to learn more about investing opportunities in India? Know what 2010 holds in store for you as an investor? What are solid investment opportunities? How much should you invest in gold? In real estate?

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We had delved on the topic - what to buy when the markets correct - in a recent issue of the 5 Min. Well, the markets have corrected by 10% since then. So what are you doing now? Being brave and investing fresh money? Or being cautious and waiting on the sidelines for the markets to correct further? Or being fearful and selling off your investments that you had originally bought for the long term?

The thought of losing money in a correction seems a terrifying prospect to most investors. But going by history, such a fear seems misplaced especially if one is invested into quality companies. Your real fear as a long-term investor should be not having enough saved to meet the financial needs of your children, or to live comfortably after retirement.

So what should you do in an uncertain market like this?

The best thing will be to avoid selling the highest quality stocks in your portfolio for a fear of correction in their prices. Over time, good quality stocks bought at low valuations always go up in price. The only way to participate in their growth is by being invested at a level that does not cause you to lose sleep.

But if you give in to fear, you'll pass up some incredible investment opportunities - ones that come with the promise of big long term returns attached.

 Chart of the day
Today's chart of the day shows that Indian companies' quarterly sales performance is slowly getting back on track to growth. For companies across market cap categories - large, mid and small-caps - sales growth stood in double digits during the recently concluded December 2009 quarter. The best performance has been recorded by the large caps (represented by the BSE-100 index), which have grown their sales by 13% YoY during the quarter. The comparative data for the mid-caps (BSE-Midcap) and small-caps (BSE-Smallcap) stood at 10% and 11% respectively.

Data Source: CMIE Prowess; Note: Smallcaps, largecaps and midcaps are representative of
BSE-Smallcap, BSE-100, and BSE-Midcap indices respectively.

The worst seems to be over for the Indian IT sector. That is what we can infer from the performance of the top four IT companies during the quarter ended December 2009. These witnessed a sequential growth of 2% in their combined topline. And their profits grew by 6% QoQ.

As we have heard from these companies' managements, improving volumes coupled with stable pricing has infused a new confidence. Better customer sentiment emanating from previously plagued industries and geographies is also fueling new hopes.

However, when it comes to the stocks of most of the IT companies, valuations do not paint a rosy picture. With a sharp rise in stock prices over the last 9-10 months, most of the stocks from the sector are already factoring this recovery. Additionally, there is a looming concern of currency volatility impacting IT companies' margins going forward. Thereby it would be wise for investors to tone down their expectations from these stocks over the short to medium term.

Data Source: CMIE Prowess

Anyways, in a sharp turnaround of sorts, Indian stock market were trading with gains at the time of writing. From being down around 265 points at one time, the BSE-Sensex recovered smartly. At the time of writing this, the Sensex was trading higher by around 100 points (0.7%). IT and realty stocks led this sharp upward move of the markets today. Other key Asian markets closed in the red, with losses seen in Hong Kong (down 0.6%) and Japan (down 1%).

As for the Indian markets, we at Equitymaster believe that after the sharp rise in stock prices in 2009, some uncertainty (correction) this year should be expected and not feared. Investors will do themselves a world of good by treating corrections as just a normal part of stock markets that will not do much in altering the long-term bull market that is India.

What would an economy be left with if the government encourages land prices to go up 10 times in 10 years? A property bubble would be the simplest answer. But for the Chinese economy, the problem is much deeper.

As per economist Andy Xie, more than 50% of the fiscal revenues of the Chinese state governments depend on the sale of land for new construction. Little wonder then that the banks have been induced to lend for purchases of the third and fourth houses by Chinese households. This has made new properties in China almost 100% overvalued, says Xie. Although the Chinese central bank has now resolved to tighten its monetary policy, the impact would be in terms of bringing down loans from 20 trillion yen last year to 17 trillion yen this year. Although significant in absolute terms, Xie believes that the tightening needs to get more aggressive. Otherwise, the Chinese property bubble could well go out of control.

Marc Faber is at it again. One of the most vocal critics of the US Fed's expansionary policies has once again argued that the US could default on its debt obligations or monetize debt and reduce it through massive inflation. "I'm convinced the US government will go bankrupt, but not tomorrow. And before they go bankrupt, they'll print money, and then you get high inflation rates, you have a depression and eventually they'll go to war," Faber is believed to have said in his most recent report.

And as a natural corollary to this scenario, Faber backs precious metals like gold as amongst his most favored investments. As he advices, "The risk is really not to own any precious metals at all."

Thus, while gold could be going through a bit of a lean patch currently, it might just be a temporary phenomenon and it is only a matter of time before it returns to its trend of being in a long-term bull market!

An interesting article in a leading business daily points out to the fact that it is not true that oil price deregulation will stoke inflation. If anything, it will lead to efficiency in consumption and a greater search for alternatives. In fact, there was a time in India when steel was controlled and oil was not. When steel was subsequently decontrolled, the market adjusted. Sooner or later, crude oil prices will start their march towards the US$ 200 per barrel mark. On the supply side, hardly any major oil reserves have been discovered in the last several years.

In our view, no matter which way you look at the future of crude oil prices, it is clear that prices of the commodity are headed upwards. The recent Kirit Parikh Committee recommendations will help us deal with that scenario. The question is - will politicians bite the bullet. After all, this is the third such committee. At some point, they will have to. Imagine the amount of subsidy burden if crude prices touched the US$ 200 per barrel mark. It would be wise for us to make systemic changes much ahead of that eventuality.

 Today's investing mantra
"If you have trouble imaging a 20% loss in the stock market, you shouldn't be in stocks." - John Bogle

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3 Responses to "Markets are correcting. What to do?"

Kersi Pirojshah Mahudawala

Feb 8, 2010

We should take advantaje of every dip and purchase shares of those Companies which are fundamentaly sound.


Rens Thomas

Feb 8, 2010

ya, sure that will, happen.


Alumiya Shaikh

Feb 8, 2010

I do agree to Mark Faber .Yes , Gold is Gold,You will be wrong,if you are thinking of buying Gold at Rs. 13000.

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