21,000 Sensex possible by year end!

Sep 30, 2010

In this issue:
» Mumbai's realty shoots up to exorbitant levels
» Fed divided over the future course of its actions
» Fidelity loses top fund status first time in more than 20 years
» Micro finance firms face the heat
» ...and more!!

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8th January 2008. A landmark day in the history of Indian capital markets. It was the day when the Sensex closed at an all time high of 20,873. It has been more than two years since and the all elusive 21000 mark has still not been breached. But this could change soon. And the onus of the same could fall on that most influential of all sets of investors, the FIIs.

As per a leading daily, FII investments have topped US$ 18 bn so far this year. This surpasses the record set in 2007 with another three months to go. Hence, it will not be too out of place to think that the FII investments this year could top the US$ 25 bn mark. After all, nothing has changed in the West and the Indian growth story remains as strong as ever.

What does this imply for the Sensex level? Well, if the trend of the past few years is any indication, market value of Sensex rises by Rs 13-14 for every rupee put in by FIIs in the Indian stock market. Now, let us extend this logic to the current year as well. Another US$ 7 bn to 8 bn worth of net FII inflows for the remainder of the year have the potential to take the Sensex past that elusive 21000 mark. Thus, another landmark could well be awaiting Sensex in the year 2010 itself.

It should be noted that predicting Sensex levels is not a perfect science. And we could well go wrong with our predictions. Infact, we think there is a better way of making money in stocks in the long term. Look out for companies that have strong competitive advantages and are run by honest management. Buy into them at reasonable valuations and repeat this process over and over again and you may never have to worry about index levels for the rest of your lives.

 Chart of the day
Today's chart of the day shows the returns from three of the most lucrative asset classes in 2010. These are Sensex, Gold and Silver. As can be seen, the year so far has belonged to Silver, the white shiny metal, as it has gone up by more than 20% in rupee terms. Sensex and Gold lag somewhat, especially the latter as it has returned just 13% so far this year. With gains of 15%, Sensex returns have fallen between gold and silver. Going forward, it is quite likely that both Gold and Silver edge past the Sensex as while the Indian benchmark is flirting with its lifetime highs, gold and silver still have some distance to go when adjusted for inflation.

Source: Trend software

An entire industry - analysts, fund managers, experts, and media - works furiously at picking stocks. Basically, trying to beat the stock market. The moot question remains, is it possible to do so? One person who categorically said it is not possible and built an institution around the idea is John Bogle of Vanguard. And time seems to have vindicated his stance. As per reports, Vanguard Group Inc. has unseated Fidelity as the largest US mutual-fund company by assets, a position the latter held for more than two decades.

In our view, assets under management reflect popularity and marketing prowess and not necessarily superior technique. Having said that, there is indeed a lot of merit in the idea that most 'professional' managers do not beat the market. Their cost structure is too high and the pressures of their trade encourage short term thinking. So unless investors know their craft and have the right attitude, investing in broader indices can be better than stock picking.

Micro finance institutions (MFIs) hoping to make money and raise funds the 'SKS way' are in for some huge disappointment. The big ticket IPO of India's largest and most profitable micro finance company (SKS Microfinance) has ruffled many feathers. The MFIs meant to provide funds to the poorest of the poor were initially seen as serving a social cause.

Unfortunately, the 'Messiahs' of the poor are now being seen as parasites. As if the clampdown by the RBI was not enough, even state governments are issuing mandates on the MFI's lending norms. And the same is expected to hurt the business prospects of this so-far unregulated sector significantly. Prime amongst them is the regulation of lending rates. With such embargos and stiff competition from PSU banks, the future of MFIs in India is questionable.

Living in Mumbai seems to have become a nightmare. The potholed roads, crumbling infrastructure and commuting woes is just one aspect. The other bigger issue is that of escalating property prices. Digest this. The average cost of a flat in the country's financial capital is now at an all-time high of Rs 1.9 crore. This number has been arrived at by the rather unique method of dividing the total capital value of all flats by the total inventory in each city.

Effectively what it means is that homes on an average are inaccessible to all sections of the society save crorepatis. This when other important cities in India such as Delhi, Bangalore, Hyderabad, Chennai and Pune have witnessed either a drop in rates or a negligible increase. An average flat in these places is relatively affordable at Rs 35 to Rs 50 lakh. For some strange reason, developers in Mumbai seem adamant to stick to such exorbitant rates when it is obvious that demand will just vanish. Will these developers see reason anytime soon? Hard to tell.

One of the world's smartest and most reputed bond fund manager Bill Gross of Pimco recently talked about the 'new normal'. As per him, this is a period of extremely reduced economic growth and stagnant stock prices. In fact, Gross has maintained his bearish outlook on the US economy for quite some time now. He has now just reiterated his view by saying, "Even the wildest bulls on Wall Street and worldwide bourses would be hard-pressed to manufacture 12 percent equity returns from nominal GDP growth of 2 to 3 percent."

Anyways, Gross is not all that bearish about the future of the world economy. He indeed talks of hope for a better future. He says that a new foundation for prosperity is needed. And the best way to do this, as per him, is the good old-fashioned investment in production.

Trying to exhort an economy out of recession is as difficult a problem as problems can get. The world's largest economy, the US, is grappling with a similar problem. And the US Federal Reserve, who is in charge of the country's monetary policy, is in splits about how to go about solving the same. Three Fed officials found themselves holding opposing views recently when it came to debating what the Fed's next move should be. Some of them felt that the Fed should continue buying government debt in a bid to keep interest rates low and stimulate spending in the economy.

Others felt that the Fed has already fired enough of its monetary policy bullets. And that further such initiatives will not have the desired effect on the economy. They could infact cause other adverse effects for the US over the long term. It should be noted that the Fed ended up buying a total of roughly US$ 1.7 trillion of mortgage securities, debt and government bonds during the recession. With many of the problems facing the US today being first of their kind, it seems like the Fed will have to continue navigating through uncharted waters for some time to come. No easy answers are in sight. And trial and error seems like the only option available.

Meanwhile, benchmark indices came off the day's lows as the Sensex was trading just below breakeven at the time of writing. Finance stocks like HDFC and HDFC Bank were seen providing some resistance to the bears. Most of other Asian indices closed in the red whereas Europe is also trading in the negative currently.

 Today's investing mantra
"If you are honest, hardworking, reasonably intelligent and have good common sense, you can do well in the investment field as long as you are not too greedy and don't get too emotional when things go against you." - Walter Schloss

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8 Responses to "21,000 Sensex possible by year end!"

subhash chander

Oct 18, 2010



S.L. Narasimha Rao

Oct 9, 2010

Re: Micro Finance Institutions (MFIs)

Neither RBI nor the Politicians have seriously analysed the issue. PSUs can never match the reach of the MFIs and service levels. Through MFIs there is a ray of hope for the poor to get out of the clutches of the Local Money Lender (LML).

The MFIs gave a tough competition to LML. It is the LML who got hold of the politicians and made them cry wolf over the interest rates. The LML normally charges more than 100% interest for the risks (the loans to the rural poor are without any security and have high levels of default) and only sometimes charges 60-80%. What is wrong if MFIs charge 30-36%. By capping the interest rates both RBI & the politicians will be driving the poor to the clutches of the LML.

Instead why doesn't RBI mandate all banks (both PSU & Private) to open one branch for every cluster of 5 villages and then cap the lending interest rate at 24%. Let alone the question of making a profit, I can challenge that no employee will be willing to work in the remote areas. Then why kill the Goose laying golden eggs



Oct 3, 2010

If the corruption, nepotism and hoarding of essential goods is controlled, then 21000 seems to small a figure to achieve. In the next three decades nobody can stop INDIA (except the divine intervention) it will just keep on galloping surmounting all man made hurdles (Pak, Bangladesh, China, US etc etc.)
we just need to instil the self confidence in the youth, we can achieve any thing under the sun. who said 21000???????????



Oct 3, 2010

we our one orgenasition ared. we want finance link our activites self helf group formation



Oct 2, 2010

I follow EM research and since it is based on value I am not bothered abt the sensex. I ve seen moderate only appreciation but that also ensures that the down side is limited when 2008 repeats itself after a bull run to 21000 or 25000 whatever it is.



Sep 30, 2010

Todays investing mantra
"If you are networked with HNI's, know operators, have insight through political contacts & know some media house anchors, you will always do well irrespective of any fundamentals of economics or companies"



Sep 30, 2010

The gamble that US & other nations are playing of pumping $, which are available at almost 0 interest, will pay off. The Sensex will surpass all analyst calculations as long as FII are allowed to make merry. They are earning on both counts stock appreciation & currency. Even if the short term money goes it will be replaced by long term funds. Till the US doesn't print its way to prosperity it will use our markets to cover their losses through their investment houses. THINK BIGGER than 21000, there is no stopping this charging bull.


Antony Motha

Sep 30, 2010

Given their medium term potential, BRIC economies will continue to find favour. As for India: 21000 by year end is not just possible; it is highly probable.

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