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Is this a good market? Please don't ask

May 18, 2009

In this issue:
» Stocks surge on UPA's decisive victory
» India Inc.'s wish-list for the new govt.
» The bright side of slowdown
» Gold, the underperformer
» ...and more!

----------- Stock markets are on a tear... time to be careful -----------
Beware of enthusiastic TV anchors and unscrupulous brokers!
This is the time to lay the foundations for a wealthy future. Not the time to speculate in momentum stocks.
Our recommendation - go out and invest in blue-chip stocks that are available for dirt cheap.
To know how you can go about picking the right stocks for your blue-chip portfolio, read on...

With the Indian populace giving a clear mandate to the Congress led UPA and its alliance partners, it was being anticipated that the stock markets would receive a big boost. But what transpired today must have left even the most bullish of investors gasping for breath. For the first time ever in the Indian stock market history, trading had to be suspended for the day as the benchmark NSE-Nifty breached the 20% circuit filter. And the rally was not just restricted to a few stocks.

There wasn't a single stock on the Sensex that ended the day in the negative, with more than a third of the stocks bagging gains of more than 20%, and 75% of the remaining notching up gains between 10% and 20%. With the new government widely expected to pull out the 'reform' genie out of the bottle, stocks from sectors like infrastructure, banking and real estate where reforms are badly needed, really hit through the roof.

Key BSE indices: First they lost a lot, now they've gained a lot
Source: Trend

While the BSE-Sensex ended the day up a whopping 2,099 points (17.2%), the NSE-Nifty closed with gains of 636 points (up 17.3%). The BSE Mid Cap and Small Cap indices surged 12% and 9% respectively. While all the sectors had a field day, gains in banking and realty stocks really stood out. Most other Asian markets ended on a mixed note.

In times such as these, where there is a tendency to get carried away and a temptation to go with the flow, it always makes sense to step back and have a reality check. While we do want to sound like party poopers, the fact remains that the changes that investors and companies are yearning for will not happen overnight. Although the re-election of the UPA government with Dr. Manmohan Singh at the helm and most importantly, without the baggage of the Left parties does set the ball rolling in the right direction, we will advise you not to go overboard with your stock investments.

Furthermore, the problems that India Inc. is facing like demand slowdown, leveraged balance sheets and a poor exports scenario to name a few, do not get washed away with the election results. Hence, we urge investors to do a thorough bottom up analysis and invest only in those stocks which boast of strong fundamentals from a long-term perspective. Last but not the least, keep a close eye on valuations for even the best stock will not do you any good if bought at expensive valuations.

Successful investing is all about discipline, so say the famous investors...from Warren Buffett and John Templeton, to Peter Lynch. Even while stocks across the sectors are still trading at attractive valuations from a 3 to 5 years perspective, it is pertinent for you to assess each and every opportunity very carefully rather than simply jumping into buying anything just because everyone else is buying. Of course, a stable government at the Centre would mean that India can move on its path to reforms with relative ease, but things will still take time to take off given our bureaucratic setup and slow decision making process.

Don't Miss: Ajit Dayal's view on the outcome of the elections!
Ajit Dayal's view on the outcome of the elections!

As a new government, or the old one in a new avatar, steps into the South and North Blocks in New Delhi, India Inc. waits with bated breath to spell its wish list of things to do. As reported in several business dailies, Indian companies now expect the government to dole out a fair dose of policy reform given that it (the government) now doesn't need to take care of the whims of the Left parties, which have acted as the main hurdle to the reforms process all these years. The corporate sector is especially looking out for reforms in sectors like retailing, pension, and insurance, as also in labour reforms where the Left had made the most noise.

In this regard, The Economic Times reports that tax sops are also on top of corporate India's agenda to tide over the ongoing economic crisis. The report states, "The ailing export sector, which in October witnessed a decline for the first time in a decade and missed the target of $175 billion, has sought income-tax exemption for some five years."

Well, as per some newspaper reports, India Inc. is pitching for Dr. Montek Singh Ahluwalia to become the next Finance Minister while it is wishing P. Chidambaram to stay as the Home Minister. Whoever is in charge of this portfolio, the task upon him will be humongous given the fiscal mess we are currently in.

Source: Trend
The Left parties might be itching to tell UPA of the impact they have on investors' psyche. While its presence in the government had led to the stockmarkets crashing when the last elections results came out (May 17 2004-see adjacent chart), its absence this time around has led to mass euphoria on the bourses. The fear in 2004 was that the communist parties would impede upon India's economic liberalisation, and true to their colours, they did a lot of harm to the country's economic progress.

This time around, investors seem to be extremely cheerful as Left parties will have no role to play in the government decision making. In fact, even the role of demanding regional allies has considerably shrunk this time. Or what would justify the thumbs-up that the markets have given to the election verdict?

If you've begun dreading the word 'slowdown' and think that nothing good can ever come out of it, think again. A slowdown can indeed be a very good thing. Apart from a whole list of other positives that can be enumerated, here's one currently being felt. An Economic Times report highlights how direct selling agents, who earlier sold unsecured bank products such as credit cards and personal loans, are today firmly moving towards selling safer products such as secured loans against property, commercial property and housing loans.

This is a result of banks, which have tightened norms and have become very stringent in approving unsecured loans. That's great news considering the devastating effects a protracted frivolous extension of credit can have on an economy, like the sorts we have just witnessed in the US.

The Indian rupee was also a beneficiary of the stock market surge given that the currency rose by almost 3% to 47.92 against the US dollar at the time of writing. Given this strength in the rupee as also an overall euphoria surrounding stockmarkets, gold prices in the domestic market fell by around 2%.

Year to date, gold prices have just risen 4% while other precious metals such as silver, platinum and palladium have each risen by more than 20%. This is indeed surprising as the rise in the prices of these precious metals seem to be indicating that the global economy is well on its way towards a recovery. This could well be true as the reckless printing of money by governments across the globe and fiscal incentives fires up the real economy but once the velocity of money increases and the increased liquidity starts showing its true colours by way of higher inflation, attention may once again veer towards the yellow metal. For the time being though, it seems to be going through a consolidation phase.

Headline inflation (as measured by the wholesale price index or WPI) may have eased. But have the prices of food, vegetables, edible oil, cereals witnessed a similar dip? The answer is no. Consumption products such as food and grocery have not come down and they account for nearly 16% of consumers' share of wallet. Consumers are still feeling the pinch of high prices. The same is reflected by consumer price inflation (CPI) which is still at 8%. CPI indicates actual increase in price that eventually a consumer has to bear. So there is no reason to cheer about a drop in WPI to 0.48% for the week ended May 2 as the benefit of easing inflationary trend has still not reached the ultimate consumer.

After much uncertainty, the Indian IT industry is finally witnessing some clarity in the IT budgets of its clients. The spending cuts in some of the verticals have stopped, as reported by a leading business daily. The banking, financial services and insurance sector (BFSI) vertical, which was the first hit by the crisis, is showing signs of a turnaround. However, manufacturing, retail, hi-tech and others verticals, which got hit later, are yet to bounce back.

 Today's investing mantra
"When purchasing depressed stock in troubled companies, seek out the ones with the superior financial positions and avoid the ones with loads of bank debt." - Peter Lynch

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2 Responses to "Is this a good market? Please don't ask"

A. Kohale

May 18, 2009

for your comment regarding CPI being 8%, does that mean it is 8% throughout the country? isnt CPI regional index and vary dramatically from region to region in the country? Although the inflation in our country is measured by WPI, CPI is what consumer pay for the goods. What can govt. do to reduce CPI?



May 18, 2009

i find your 5 minute wrapup quiet informative and educative. your presentation and coverage of news and information is very good. congratulations and my best wishes to you for this splendid work being done by you.
lekshminaarayanan.r.s. (Former Senior Manager, Canara Bank)

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