»5 Minute Wrap Up by Equitymaster

On This Day - 30 DECEMBER 2009
What will you buy in 2010?

In this issue:
» Two market gurus' views coincide once again
» World credit market shrinks for the first time in 15 years
» India's largest bank says it will not hike interest rates
» SEBI moots punishment for IPO scamsters
» ...and more!!

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Asset allocation works. Ask those who were 100% invested in equities in 2008. Their portfolios were shattered as the year ended. However, those with a proper allocation between stocks, bonds, gold, real estate, and cash (for emergency needs) were a better lot.

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%).

Data Source: Trend

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.

 Chart of the day
Food prices are really pinching the average citizen out there and pinching big time! Today's chart of the day helps throw some light on one of the fundamental reasons behind the same. As shown, the area under grain harvest in major countries has come down steadily over the years on a per capita basis. This, even as the world population rising and per capita grain consumption going up. Even elementary economics would be enough to conclude that prices have but one way to go, up. If the world has any chance to feed its huge population and that too, without any riots, as higher food prices usually cause, the only solution would be to bring about a dramatic improvement in agricultural productivity and come down hard on wastage of any kind. Otherwise, be prepared for sustained increase in food price inflation.

Source: Earth Policy Institute

Bloomberg reports that both Marc Faber and Barton Biggs are bullish on the US dollar and US equities in the New Year. Interestingly, their views are coinciding once again. Last time they agreed upon something, the stock market witnessed one of its best rallies in decades.

"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.

Are you one of those who had applied in 21 IPOs that opened between 2003 and 2005 and were not allotted even a single share? If so, you may be in for a windfall gain. That is because if you haven't been allotted any shares in the IPOs during that period, you may have been a victim of a devious scam. Between 2003 and 2005, a group of investors opened thousands of demat accounts, some even in fictitious names, and cornered shares reserved for retail investors. In some cases, they even used photos of random people, procured from photo studios for the purpose. The IPO scam related to 21 IPOs, including for offers like NTPC, TCS, Jet Airways, IDFC, YES Bank, Suzlon Energy and Shoppers' Stop.

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.

Here's a shocking statistic! A firm called Mizuho Securities has reported that the world credit market has shrunk for the first time in 15 years. This means that for the first time in 15 years there have been more firms who've either repaid debt or stayed away from it as compared to the ones seeking debt. This seems shocking because it has happened at a time when the US Fed has perhaps had the biggest expansion in its balance sheet.

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!

Looks like there is a revival in demand for luxury homes and villas. And real estate players are quickly looking to capitalise on this trend. Last year, the scenario was very different. Due to the slowdown, demand for villas and bungalows plunged severely, affecting property developers. The focus then shifted to affordable housing in order to bolster sagging volumes as premium projects were put on hold. Now, many real estate players are set to launch new projects in the premium segment. Large developers such as Unitech, Parsvnath and Jaypee Greens have all launched villa projects in the last two months to tap demand for such properties.

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.

SBI Chairman, Mr. OP Bhatt has good news to cheer you up for the New Year. The largest public sector bank in India has no plans of increasing the interest rate on loans at least for next six months. The prime banker believes that the existing surplus liquidity and the increasing number of bank deposits allow the banks to defer any plans of an interest rate hike. The bank's supply and demand situation favors continuance of existing rates.

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.

Meanwhile, the markets are trading lackluster currently with the BSE-Sensex down a marginal 30 points at the time of writing. The Mid cap and Small Cap indices however, are witnessing a positive bias. While Asian markets closed mixed today, weakness is being seen among European indices currently.

 Today's investing mantra
"We don't get paid for activity, just for being right. As to how long we'll wait, we'll wait indefinitely." - Warren Buffett

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