Should investing approach change with seasons?

Jul 5, 2014

In this issue:
» Emerging economies too will slow over the long term
» Chances of a drought this year rise to 60%
» Cleaning up India's infra sector
» Hard work never killed anyone? Wait till you read this!
» And more!

Just like we have summer, winter and the rains, Dalal Street too has its own set of seasons. And while the former follow a more or less predictable pattern through the year, the latter come and go with absolutely no notice or warning.

One has only to look at the very recent past to see this live in action. In a matter of just a few months, the environment in the stock market has gone from utter hopelessness to joyous optimism. From one where capital raising by companies had come to an almost complete halt, to one where newspapers these days are strewn with announcements of QIPs and IPOs. From one of rampant undervaluation, to that of fair valuation.

Indeed, the season has decidedly changed on D Street.

And just like you may have recently ditched your sunscreen for an umbrella to cope better with the change from summer to rains, a wise investor will similarly be quick to re-equip himself according to this change of season in the stock market.

The drastic change in price levels now demand that you turn from someone looking to generously buy stocks to someone looking to carefully sell his stocks as and when individual opportunities present themselves. The battalion of new IPOs set to make an appearance demand that you become increasing wary of their glib marketing pitches. Managements going back to announcing aggressive growth plans and rosy projections will demand that you become increasingly cautious and skeptical about valuations justified by such over optimism.

There is a third season too on D Street - boundless euphoria. Here, stock prices lose all semblance of gravity. Analysis and valuations don't seem to matter anymore. We are not there yet. But as it is with seasons on D Street, who knows how quick we may get there. Trust us though to promptly and surely let you know.

Have you been changing your approach with this change of season in the stock market? Let us know in the Equitymaster Club or share your comments below.

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 Chart of the day
The last many years have been pretty volatile as far as global GDP growth is concerned. In the years leading to the 2008 crisis, the emerging economies such as China and India were growing at a scorching pace. Then the financial crisis unraveled in 2008 and sent growth of the developed world into a tailspin. While emerging economies were expected to rebalance overall growth, that has not exactly happened so far. That is because emerging economies in recent times have been seeing a slowdown in growth not only because of a weak global macro environment but also because of various other problems in their respective economies. Thus, as per an article in the Economic Times, OECD has pegged global growth between 2001 and 2010 at 3.6%.

How will this picture look another 50 years down the line? Not too great because global growth between 2050 and 2060 has been pegged at a lower 2.4%. The growth is largely expected to come down on account of two factors. One is an increase in ageing population which will put pressure on government budgets. The other is that the kind of growth that emerging markets are seeing right now will likely moderate going forward. What's more, growth going forward would largely be a product of innovation and investment in skills. So it becomes very important for governments across countries to focus investing in these areas immediately.

Emerging economies too will slow over the long term

Despite the rain gods being kind over the last two days, the fear of drought like situation has not been completely eliminated. As per Skymet Weather Services Pvt Ltd, a private weather forecaster, there are 60% chances of drought following a poor monsoon in the month of June. The El Nino phenomenon is being blamed for a poor forecast. The last time, when El Nino disrupted normal monsoons in 2009, India witnessed its worst drought in about 40 years.

It is too early to say whether we will witness a drought and food price rise of such proportions this time. But the government has already started instituting steps to check crop availability. For instance, there will be stockholding limits on potatoes and onions. Also, fruits and veggies have been delisted from the draconian Agriculture Produce & Market Committee (APMC) act sometime back. Such steps can help curb food inflation for the time being. However, if rainfall is indeed insufficient, the harvest is bound to get impacted. And with limited crop availability, even the government may be able to do very little. With July being the wettest month traditionally, we shall get to know soon if a full-fledged drought and subsequent food inflation indeed becomes a reality.

We believe it was Ronald Reagan who once opined that hard work never killed anybody but then why take chance. Well, had he been in China in the current times, he may have had to change his mind perhaps. For as reported by Businessweek, there are about 1,600 people dying each day precisely because of this reason. In other words, around 6,00,000 people in China die each year from toiling too hard! Well, we don't quite know whether to put this news in the finance category or it's more to do with motivation and self-help.

Stellar economic growth and the pursuit of riches is of course one of the major reasons why this is happening. But part of the reason is also cultural as per us what with the Chinese belief in Confucian ethos of extreme hard work and putting in more than 100%. That said, the phenomenon is not restricted to rapidly emerging economies like China. Even the developed world faces this new age epidemic of overwork. So, what do you think is the way out? Indicators like Gross National Happiness that seek to balance both material and spiritual well-being? Well, may be.

The infrastructure sector has been badly hit by the economic downturn. Thus its hopes are pinned on the Union Budget to be unveiled on 10th July. However, macroeconomic woes are far from over. In fact food inflation is climbing up once again on looming fears of poor monsoon. Even crude prices are firming up as Iraq remains under siege. A falling rupee is likely to further add to the fiscal deficit burden. In the last two months, fiscal deficit swelled up to a six-year high of 45.6% of the full-year target. Therefore with India's finances remaining on tenterhooks, one can hardly expect the government to announce big-ticket investments in the sector.

However, the morale of the sector can still be boosted through a host of non-monetary measures. These include steps for fast clearance of stalled infra projects by encouraging greater participation of the private sector, earmarking must-do projects and setting up infra funds/trusts for quicker financial closure. It is measures such as these that are likely to set the ball rolling and kick-start the economy.

Global markets were in a buoyant mood and most major indices ended the week at or near their all time highs. Indian markets led the way as expectations of a market friendly budget pushed the Indian indices higher by 3.4% in the week gone by. The US markets buoyed by a positive jobs report shrugged off the news that GDP in Q1 had contracted by 1%. The benchmark Dow Jones Industrial Average (DJIA) closed the week above the 17,000 level for the first time. European markets were driven by positive sentiment due to assurances by the European Central Bank (ECB) that its negative interest rate policy would continue for the foreseeable future. The British FTSE 100, the German DAX 30 and the French CAC 40 indices ended the week up 1.6%, 2% and 0.7% respectively.

Performance during the week ended 04 July, 2014
Data Source: Equitymaster

 Weekend investing mantra
"Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time: You can't produce a baby in one month by getting nine women pregnant" - Warren Buffet

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