|»5 Minute Wrap Up by Equitymaster|
On This Day - 30 DECEMBER 2009
What will you buy in 2010?
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Now those who talk about asset allocation generally end the discussion at these various asset classes. However, equity investors would do well to go a step even further. They can further allocate their equity portion between large caps, mid caps and small caps. While large caps are the safest of the lot, mid and small caps while being risky can generate the best returns over a long run. So a proper blend of these different categories of stocks can help you generate good yet stable returns over a 5 to 10 year period.
Now as we move into 2010, investors in small cap stocks must be the happiest lot. This is on the back of about 125% returns of BSE-Smallcap during 2009. This is higher than the returns recorded by the BSE-Midcap (106%) and BSE-Sensex (80%).
So, where will you be investing in 2010?
Large caps? Mid caps? Or small caps?
Well, the answer is - it depends on your long-term needs and risk appetite. But purely as a matter of prudence, one looking to build a portfolio from a 10 to 15 years perspective can have a 60-70% allocation to large caps and 10-15% each to mid and small caps... and quality stocks in each of these categories.
Treat this allocation as just a guide and, we repeat, allocate your equity portion using your understanding of different kinds of companies across different levels of market cap.
"History would suggest that after such a severe economic shock like we've just had that the odds are that we're going to have a pretty good burst of growth in 2010, 2011", Biggs is believed to have said. The US Fed will have to inject more liquidity into the system, spurring inflation that prompts investors to shift assets to equities from treasuries and cash, added Faber.
The arguments that both these gentlemen have put forth indeed sound logical. But even they would be willing to agree that their predictions are based on shaky grounds. The US economy is extremely vulnerable right now and it won't take a pretty big fire to raze down the recovery process. A tiny-winy spark would do just fine. Hence, any investment based on the thesis that the US would recover may have to be undertaken with caution.
However, a SEBI committee that was set up to suggest ways to compensate those investors who were affected by the IPO scam has said that money recovered from the scamsters should be distributed among the affected IPO applicants. The committee has now also suggested ways to recover the gains from the scamsters and distribute the same among those affected by the scam. Further, the amount which is the difference of closing price of shares on the first day of listing/trading on the NSE and the IPO price may be considered for distribution. However, the best part of this is not even the money that the investors will receive. It is the clear signal that will go out to market manipulators who may have such schemes up their sleeves to not mess around with retail investors anymore.
What explains the anomaly? Simply put, the money that has been lent to the US banks is not travelling further and is stuck in the system. And this is hurting economic growth. People have become so risk averse that even though there is plenty of liquidity in the system, neither the firm nor the US consumer wants to spend as freely as before. And this is the biggest challenge that Team Ben Bernanke is likely to face in its effort towards reviving the US economy. The confidence of an average American has been badly scarred and unless that is restored, no matter how much money comes their way, they are not likely to return to their old ways in hurry. On second thoughts, they might not return at all!
Even in Mumbai, where property prices are very expensive by any yardstick, developers are looking to build such luxury homes on the periphery of the city where the land prices are low and thus the potential of healthy margins high. Having said that, it cannot be said with certainty that the trend has entirely shifted towards such homes and one will have to wait for a few more months before any real picture emerges. At the end of the day, we believe that property prices will remain a contentious issue not just for premium properties but also for affordable houses.
The banker also expects the government to continue with the stimulus package for some time till the desired growth in credit and overall economic activity improves. We expect the other banks to resonate his views. After all, it was SBI which pegged its home loan rates at 8% early this year. The entire banking system followed suit. The result? Builders and buyers came back on the scene and demand revived for steel, cement and construction businesses. This gave a big boost to the economy.
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