Does bottom fishing make sense now?

Dec 26, 2011

In this issue:
» India's energy deficit set to increase
» SEZ policy dying a painful death
» Realty firms still piling on debt
» "Derivatives still threaten global markets": Mobius
» ...and more!
----------------------------------------------- What's Next For India? -----------------------------------------------

India's economy has swung from being a darling of the world to a damned nation. All that in a matter of months.

So, what lies ahead for India? How could this impact your investments?

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The Indian stock markets have had a bad time since the beginning of the year. The benchmark BSE-Sensex is down by nearly 25% since 1st January, 2011. The index is currently trading at valuation multiples below its 3 year historic average. This has led many an investor to wonder if the stock markets have bottomed out. Does this mark the turn of events? Or is it time to go 'bottom fishing'?

In simple terms, the phrase 'bottom fishing' refers to investing in stocks when it is believed that the market has reached a bottom following a major decline. True that the markets have declined quite a bit but it is still hard to tell whether this is the bottom or not. There is still so much negative news and uncertainty that cloud the markets. Corporate earnings have been under pressure in recent times and they could get worse if interest rates and inflation continue to rage high. At the same time, policy paralysis and government inaction could suppress the economic growth of the country. And not to forget that negative news from the global markets still hurt the performance of the domestic markets.

As a result, it is a herculean task to predict which direction the markets would take in the coming days. But one thing that is easier to tell is that there are still stocks that are fundamentally strong that have a sound management and excellent business models. And the best part is that these tumultuous times throw out opportunities to get these stocks at dirt cheap valuations. It is true that these stocks may see their prices decline with the general market trends in the short term. But over the long term, their stock values would definitely catch up with their higher fundamental values and offer high shareholder returns.

Do you think it is time to go bottom fishing in the Indian stock markets? Share your comments with us or post your views on our our Facebook page / Google+ page.

 Chart of the day
High inflation as well as rising interest rates may have led to a pessimistic view of Indian markets especially for the domestic investors. But it has not dampened the mood for foreign investors. Particularly for the foreign companies who have poured funds into India for acquiring Indian companies. As per the advisory firm, Grant Thornton, foreign companies and private equity funds have invested nearly US$ 22.7 bn in India. The number of inbound M&A (mergers and acquisitions) deals has jumped up to 125 from the 2010 levels of 82. A major reason for this increased inflow was the global crisis. The crisis that has gripped the developed world made fast growing economies like India more attractive.

Source: Economic Times

On account of stagnancy in production of coal by domestic player Coal India, power generation companies were severely affected and were no choice but to rely on imported coal. But given close to 20% depreciation in the rupee in the last 6 months, using imported coal has become unviable for most power companies. Massive stock piles of coal are lying in the ports but the companies are unwilling to buy at such a high cost. This means that energy deficit in our country is going to rise from the current 10% to about 12-15%. We had recently argued about why power tariffs may have to rise by 50%. Unless power tariffs are raised significantly, power companies may have a tough time honouring their debt obligations. So be ready for more power cuts and higher power tariffs in the coming times. But that is not all. Power generation has a direct impact on 2% of India's gross domestic product (GDP). It can dampen the prospects of sectors like services and agriculture. This in turn could further slow down India's already flagging economic growth.

Once upon a time, the acronym SEZ (Special Economic Zone) was one of the most common words that a person came across whenever a business newspaper was opened. But as is the case with other mega reforms, the SEZ policy too seems to be dying a slow death. A leading daily has made an attempt to zero in on the reasons behind the SEZ debacle. Not surprisingly though, it has come to the conclusion that the SEZ story has suffered badly on account of the policy flip-flops performed by our Government. As it is, the global environment is quite uncertain and if investors are to further face uncertain Government policies, then it is very clear that hardly anyone would want to take the risk. Moreover, if this were not enough, the policymakers have gone ahead and announced a brand new manufacturing policy under the name of National Investment and Manufacturing Zones (NIMZs). Will this succeed where SEZ has failed? Looks difficult indeed as the very first hurdle that it is likely to run into will be that of land acquisition. To us, a little bit of soul searching rather than the exercise of coming up with new policies every few years will go a long way towards solving our manufacturing problem. Or else we will never be able to close the humungous gap that we have allowed to open up with our northern neighbour.

The 'weapons of mass destruction' called derivatives had wreaked havoc in the financial world in 2008 and have been one of the main triggers of the global financial crisis. Indeed, investment bankers lapped on to these instruments and created more complex ones all of which drew big banks and other financial institutions into the net. So that when the crisis erupted, the entire financial sector was at the receiving end. One would have thought a hard lesson would be learnt from all this, but the menace of derivatives does not seem to have reduced. Or so Mark Mobius believes. Mobius is of the view that derivatives threaten the global financial system. He says, "We believe in derivatives, we use derivatives, but the fact remains that they remain a very, very big risk to the system because they're so used - US$ 600 trillion - 10 times more than the total GDP of the world." Given that that the scope and scale of this crisis has been so huge, a close watch will have to be kept on these instruments, so that another crisis gets averted.

Globalization is a double edged sword. The year 2011 saw its negative impact as global economic uncertainties took their toll on Indian public listings and resulting proceeds, reducing them to half within a period of one year. However, the coming years might witness its positive impact as more international companies consider India a key listing hub. The Pricewaterhouse Coopers' recently released report on capital markets suggests emerging markets like India and China to become the most sought after listing (Initial public offers or IPO) destinations for global companies in the next 15 years. In the report, India has been voted as the favorite equity market by 59% of the respondents that included senior managements of the companies across the globe. This is second to China that has been most favored by 80%. However, for such a scenario to come true in India there is a lot of groundwork that needs to be done. Winning confidence of overseas companies to list here will need a huge makeover of legal and regulatory system, along with a stable political environment.

In the meanwhile, the Indian stock markets continued to trade above the dotted line. At the time of writing, the BSE Sensex was up by 190 points (1.2%). Nearly all the sectoral indices were in the green with stocks in the technology space were leading the gains. Many Asian markets were closed today on account of Boxing Day. Japan ended the day on a positive note while markets in China and Taiwan closed in the red.

 Today's Investing Mantra
"I like to buy things I can understand. I do a lot of research on things." - Warren Buffett

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5 Responses to "Does bottom fishing make sense now?"


Dec 27, 2011

While a lot of negative news is in the pipeline, I believe that a lot of it has been factored in the current prices. While further fall as a result of partial exit of FIIs cannot be ruled out, long term investors can begin buying small quantities in select sound scrips.



Dec 27, 2011

I have not read this article but do opposite of what it says.


sarvotham yerdoor

Dec 26, 2011

The stock market reflects the current economic situation domestically as well as externally. While the external developments are out of our control, the Central Govt. could have helped ease the pain by responsible / prudent economic policies and policy initiatives. However, in spite of deteriorating economic environment, the Govt. is bent on spoiling the fiscal health of the country by introducing new boondoggle schemes instead of streamlining the existing schemes which are full of leakages and corruption. New investment through stock market for a common man is advisable only when the deteriorating fiscal situation is brought under control and the same is reflected in the overall economic situation



Dec 26, 2011

Hi Sir,
Still more head winds are awaiting for us like widening fiscal, worst bad debt scenario around the world, Rupee`s down fall against other currencies, uncertain political scenario, Still populist policy adaptation by our politicians,widening gap of earnings between commoners and rich are few to mention.Still more dangerous incidents also there to attack us in the financial front. We very well know every and all the factors are entwined with the growth factors, so the next financial year also going to be the year of slippery.
with Regards


Chander Malhotra

Dec 26, 2011

Keep your money safe in the bank. Make a fixed deposit. It is no use investing in the share market for years to come. The countries of the world are swirling on the edge of a big whirlpool which will soon speed up the rate of decline and take all investors to the bottom which can be as low as 5000 for the Sensex.

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