You need this to survive the correction

May 25, 2010

In this issue:
» Biggest beneficiaries of rising FDI inflows
» India Inc. back to generating big cash
» Can the govt. control inflation effectively?
» US govt. forcing speculation, says Seth Klarman
» ...and more!

Global concerns loom large over Indian markets. Stocks across the board are falling. While the correction hasn't been heavy till now, the problem is that it is continuing. So, what do you need to survive this correction?

Of course, you need to be liquid enough to buy into good quality stocks at lower prices. But then, apart from liquidity, what you need the most now is 'patience'!

One of the most valuable lessons you can learn from the crisis of 2008 is that you don't have to buy big time at the first sign of trouble. You need to be patient and buy in small quantities. And only those stocks that you believe will stand the test of time even if the economic situation gets worse, and rise when things get normal again.

So, if you are thinking of putting all your available cash towards buying stocks as markets correct, let us suggest an alternative.

Buy some shares now, but keep some cash handy in case these stocks fall further. By doing this, you will not miss out if the correction turns out to be mild. And if the markets fall further, you will also have a chance to buy stocks at even more attractive levels.

We know it is hard to be patient when good stocks appear as bargains. But given how irrational markets can get during depressing times like these, patience will serve you well.

 Chart of the day
Yesterday, we talked about how FDI inflows in India are on a consistent rise. Today's chart is an extension of the same, and shows the biggest beneficiaries of these rising FDI inflows. The services sector (including both financial and non-financial services) got the highest share (21%) of India's total FDI inflows during FY10. This was followed by the construction & real estate sector that together got 15% of the inflows. These were followed by computer software & hardware, telecom, and power sectors.

Data Source: Department of Industrial Policy & Promotion, Govt. of India
Note: 'Services' include both financial and non-financial services, 'Construction'
includes real estate, 'IT' indicates computer software and hardware; All FY10 data

Cash is king when it comes to running a business. And Indian companies are currently enjoying a healthy booty. The economic recovery and robust domestic demand has helped them clear their inventories fast. Also lower interest costs helped them conserve some funds in the last fiscal. FMCG and IT majors, as expected, amassed the maximum cash.

An analysis by The Economic Times suggests that India Inc increased its operating cash flow by 60% YoY in FY10. Of course, this excludes oil and gas, fertilizer and banking companies, whose cash positions are dependent on government policies. However, the growth in cash flows for investment pales against this, thus indicating that Indian companies are more cautious this time around. Despite a healthy order book and cash generation, the companies are acting prudent. They are concentrating on lowering their debt levels rather than making ambitious expansion plans. Good thinking indeed in times of global uncertainties!

Inflation has emerged as one of the biggest problem areas for the current UPA government. And with the same showing no signs of cooling off, the headache for the government continues. Anyways, Prime Minister Dr. Manmohan Singh has pledged to almost halve the inflation rate by December. Whether his government will be able to do that is, well, highly doubtful! The wholesale price based inflation has almost touched double digits. And the consumer price based inflation currently stands at over 16%!

So, what tools does the UPA have to control inflation? One, it can do this through the RBI. That is by controlling money supply in the economy. But in the current scenario, when the economic recovery is just taking wings in India, cutting money supply carries huge risks. Another way the government can target a lower inflation rate is by keeping its own spending under check. But this requires political will, which is missing in India. So this factor can also be considered bygone.

Thus, we come to the most important mean by which the government can bring inflation down. And that too on a sustainable basis! This is by way of improving the agricultural scenario within the country so that we do not face scarcity of key food items like grains, fruits, and vegetables. Rise in prices of these commodities has been one of the basic causes of high inflation currently in India. As such, if the government can do something on this account, it can credit itself with targeting inflation efficiently.

Would you like fetching zero percent return on your money? The answer is a definite 'no'! Although this is not the case back here in India, this is something that would be running in the minds of American investors. Interest rates in the US have been at zero percent for a while now. Considering the obvious answer to the question framed above, it is only natural for investors to make their money work for them. This especially in attempt of making up for money they lost over the past three years.

According to the noted investor and fund manager Seth Klarman, the US government is forcing investors to speculate in all kinds of securities except cash. "There is nothing natural in the markets. Everything is being manipulated by the government," says Klarman. From these views, it seems as though there would be bubbles developing across asset markets. Unless the US government starts moving up interest rates soon, the possibilities of these bubbles getting out of control do exist.

China, which may take over the US next year as the world's biggest market for personal computers (PCs) however has an almost non-existent software market. In China, piracy rates were as high as 79% in 2009 and according to a US based analyst, 95% of the copies of Microsoft Office software and 80% of the Windows operating system are pirated. Steve Ballmer, CEO of Microsoft Corp. is therefore less optimistic about China than other export markets in Asia, especially India where Intellectual Property(IP) protection is stronger.

China in any case, has an extremely unfriendly environment for US companies to operate in, what with Google moving out due to censorship issues, the American Chamber of Commerce facing a tough regulatory environment, and now high levels of IP piracy.

An interesting article on Bloomberg compares the similarities between the US just before the great depression and China today. Then, the US was the world's largest creditor with the most gold reserves. Now, it is China. In the 1920s, the US ran a loose and expansionary monetary policy. Today, it is the Chinese expansion of credit that has rescued the world from the financial meltdown.

Moreover, just before the great depression in the US, even shoeshine boys would dole out stock market tips. Rising share prices had become a sure thing. You can find many in China today who will give you such tips! Important to note that when things went horribly wrong in the 1930s, the US suffered the most.

Will history repeat with China? Time will tell.

Anyways, Indian stock market had a weak outing today. The BSE-Sensex was trading with losses of around 330 points (2%) at the time of writing this. This weakness was driven by intense selling in metal and engineering stocks. Among other key Asian markets, selling was seen in China (down 1.9%), Hong Kong (down 3.3%), and Japan (down 3.1%).

 Today's investing mantra
"The stock market really isn't a gamble, as long as you pick good companies that you think will do well, and not just because of the stock price." - Peter Lynch

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12 Responses to "You need this to survive the correction"

leonard king

Aug 30, 2010

It all depends upon whether a person is an investor or a
trader.The out look changes for the latter.I can only
speak as an investor, I believe that our mkts are more
suited for investors with a long term horizon of at
least 1-2 years to get a sizeable return on investment
( ROI) I believe in % of return on investment rather
than the duration a scrip is held in a portfolio(PF),
so. a conservative 20-25% return calls for some trimming.
Hence, the best strategy would be to book at least 20%
of gains and wait and watch, It all depends upon the
entry price to a particular stock. If it is an IPO
giving you about 30-40% on listing, start booking
profits in tranches of 25% at various levels so that you
dont miss out on up moves and rallies. I go by charts to
map the scrip movements and trends and use my own gut
feeling rather than predictive purposes, these helped
me to get to know support levels and resisitance levels
and erratic movements due to FII and DII and MF
activities. At 5500 I dont see much of life in the mkt
for up wards but just as a cover better to leave some to
take advantage


DC Sekhar

Aug 23, 2010

Invest in defensive, dividend paying, cash flow rich and value (rather than momentum) based mutual funds.

Neither the investments should be dead nor risky. We should strike a balance until earnings fully improve.

Asset allocation needs to be followed, based on risk appetite and tolerance levels rather than perception.



May 26, 2010

the article has been good as usual. Anyway the use of anyways may please be avoided as it is not in the dictionary.



May 25, 2010

very intelligent views..

can we guess or predict the downside nifty level.

will market come again to the levels of 2008.......


nagesh kamath

May 25, 2010

very sensible advice.


tsk venkatasubbarrao

May 25, 2010


nifty is under double flat bullish correction as per elliott wave theory..

after long rally only 15-20% it is currecting hat too with rebound the range is5400-4700 a powerful thrust rally will shortly follow

all the stocks axis bank-titan-hindalco-bajaj auto all are under going negligible correction after sustained rallies

iam very sorry to observe unnecessary hype is going on connecting global factors and indian stocks


m a ahrari

May 25, 2010

I liked the report,which is excellently discussed.Thanks. The fault with me is I do not use Stoploss,probably too optimistic.



May 25, 2010

Could you please mention the sensex index level to which you expect the market to correct?


sai sudeer

May 25, 2010

Similarities between US and China brought out my Bloomberg is an eye-opener. May be China go the USSR way ? As you said "Time will tell".



May 25, 2010

We need patience - to survive corrections. Very True.

With Patience as your main weapon, You can devise lots of strategies to survive corrections.
One strategy is - do nothing.
Just wait.

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