Should you wait till market sentiments turn positive? - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Should you wait till market sentiments turn positive? 

A  A  A
In this issue:
» The impact of fall of Potash manufacturing cartel
» Dr Subbarao's successor will have big shoes to fill
» What could China's water crisis mean for India?
» The new emerging markets are...
» ...and more!

Following the latest investing fad endorsed by the pink papers is tempting for most investors. Hot dotcom stocks in 2000, real estate stocks in 2006, infrastructure stocks in 2007 have all followed that pattern. Not just stocks but even asset classes like bonds, realty and precious metals have lured investors with their glitter. But on every occasion the assets have lost their luster before retail investors managed to get out of them. As a result every bubble burst has seen small and unsophisticated investors losing their shirts. Betting on stocks, realty and bonds, however, remains a staple need every time the market sentiments turn optimistic.

In the current economic scenario, investors are at loss of credible and safe investment opportunities. Economists have used every opportunity to downgrade India's prospects. The central bank has been issuing warnings for months now. Corporates are determined to not invest a penny more until they are ridden of policy bottlenecks. The government has its sights solely focused on nothing but elections. And global investors like Jim Rogers wish to short India! Needless to say, the glitter is nowhere to be seen. Should investors be happy stashing money under the carpet then? Given the inflation level in India, even that is not a viable option.

But if you were to ask investing legends like Buffett, Munger or Peter Lynch, they would tell you that it is always darkest just before the dawn! Hence it serves no purpose to wait for the next hot asset class before investing in it.

No doubt the near term future seems rather volatile for Indian investors. The government is busy creating separate states and offering subsidies. The regulators and central bank are courting one crisis after the other. But this has been the case with Indian economy for decades now. Even all this while, some groups of investors have managed to comfortably meet their financial goals. They are ones who kept their return expectations moderate and focused on asset allocation. Only those chasing high returns with high risk investments had the pitfalls in investing track record. So while there is no reason to wait before sentiments turn positive, investors should keep their return estimates moderated from bonds, gold and stocks alike.

Do you think investors should wait for market sentiments to turn positive before investing? Please share your comments or post them on our Facebook page / Google+ page

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01:35  Chart of the day
Interest rates in India are nowhere closer to the levels seen in 1992. The benchmark lending rate went to as high as 19% in 1992. The economic shocks coupled with high interest rates took a toll on leveraged corporates. What followed was a spate of insolvent companies moving to Board for Industrial and Financial Reconstruction (BIFR). Neither the economic crisis nor the level of interest rates is as dire as they were exactly two decades back. But the steep debt to equity ratio amongst India corporates is a sign of worry. It clearly shows that instead of focusing on keeping balance sheets lean, companies are betting on rate cuts. Something that now seems a lesser possibility than ever before!

Source: IMF

What is the best way to keep making profits if you are a large manufacturer of commodity? Simple, have economies of scale so high that it is difficult for any smaller player to match your cost structure. But what if the industry is slightly oligopolistic in the sense that a handful of equal sized players enjoy most of the market share? Well, look no further than OPEC. By ganging up together, this small group of oil producing countries works towards ensuring that the price of oil does not go below a certain minimum threshold. The idea is to match supply with demand so that member countries earn profits on their sale. Sadly, a similar cartel in the area of potash manufacturing fell apart recently. The end result? Potash prices are expected to fall by a strong 25% in the aftermath of this move. In fact, as per FT, a combined US$ 20 bn has already been wiped off from the market cap of world's leading potash producers. This is music to the ears of India though as it meets a large part of its potash requirement through imports.

Until recently, the emerging markets, especially the BRICs, were the propellants of growth through the gloom of the crisis. But things have changed. The 4 countries of Brazil, Russia, India and China, otherwise referred to as BRICs are seeing signs of a slowdown. This has made many question whether this is a temporary blip or are they capable to return to their stellar growth rates? As per an article carried by the Economist, the answer to this question rests with China. A lot of growth in the other BRIC nations was driven by the energy and commodity demand from China. China now needs to move towards a more consumption driven growth rather than its past model of investment driven growth. The latter has run out of steam. Therefore the only way forward for China is to drive consumption in its own economy. And it has the reserves and resources to do so. Though it may not go back to the super growth seen in the past, but it will still be higher.

This spells as bad news for the other 3 countries. So what do they do? In particular, what should India do? The answer is simple to give but difficult to implement. The answer is reforms to remove the structural issues that are plaguing the economy. It is crucial for the government to press its foot down on the reforms accelerator to drive growth for the future.

The global financial crisis was so massive that it brought several mighty banks in the rich world down on their knees. But Indian banks emerged relatively unscathed. One of the primary reasons for this was the independence of the RBI and strict regulations. And the current governor Mr Subbarao has also not kowtowed to the demands of the Finance Ministry and Mr Chidambaram. This was tested to the hilt during India's recent economic slowdown. With GDP slowing down, pressure had mounted on the RBI to lower interest rates. But inflation has not really cooled down. And it was this that led Dr Subbarao stick to his guns and not lower rates. The governor has also been vocal of the responsibility of the government in bringing inflation down. After all, the RBI with its monetary tools can only do so much. A lot of the problems that India is facing currently including inflation have been the result of high inefficiencies in government. So as long as both agree towards what is good for the economy and work towards the same, there is no reason why some of these problems cannot be addressed. But if the government pursues its own populist agenda, looking for short term fixes and without any willingness to correct its mistakes, we see no reason why the central bank needs to toe the government line.

Water is a necessity for life. As such, water crisis can have serious repercussions on mankind. And it appears that China is on the verge of facing one such crisis in future. As per news reports more than 400 cities in China lacked sufficient water last year. And out of that 110 cities faced severe water scarcity. Now it is not that China does not have abundant water resources. It is the way in which this commodity is being utilized has created a cause of concern. On an average, industries in China use 4-10 times more water than similar economies. These industries are also polluting the existing water resources. One Chinese survey report indicated that 90% of the ground water is polluted.

Contamination of water is likely to result in water scarcity and health risks for the Chinese people. Thus, government should immediately take steps in this direction. If not, China can run into a severe water crisis. And this may result in a political crisis of sorts. It may be noted that few Asian rivers originate from China. If China internally faces a water crisis it may even divert the route of these rivers. This may impact water flow in other countries and result in political tensions.

Emerging markets were the buzzword in the previous decade. The high economic growth rates and favourable demographics made them the favoured global investment destination. But in recent times, the emerging market story has come under a cloud of doubt. Investors are no more enthused about these global growth engines. Ever since the US Fed Chairman Ben Bernanke hinted on the likelihood of a tapering of the bond buying program, capital has been flowing out of emerging markets.

An article in Reuters very well highlights the changing investor approach towards emerging markets. Investors are no more looking for high headline growth rates. They are now looking for markets that have a sustainable economic model. As a result, the emerging markets are getting redefined. Some new names to this category are Mexico and Philippines.

What are these countries doing to make their economic models sustainable? Both these countries are encouraging domestic savings. These savings are then being channelized to fund infrastructure projects. This in turn is expected to drive economic growth. It is no surprise that both equity and bond funds in these countries have attracted net inflows over the last six months. On the contrary, countries with large financing needs saw investors selling off their investments in these markets.

We believe there are very pertinent lessons for India. What we really need is not just high growth rates, but a sustainable economic model. We hope policymakers are listening.

Continued profit booking in power, banking and commodity heavyweights has kept the key indices in Indian equity markets below the dotted line today. The BSE Sensex was trading lower by around 74 points at the time of writing. Key indices in Asia, except China closed lower today while markets in Europe have opened a mixed bag.

04:50  Today's investing mantra
"There seems to be an unwritten rule on Wall Street: If you don't understand it, then put your life savings into it. Shun the enterprise around the corner, which can at least be observed, and seek out the one that manufactures an incomprehensible product." - Peter Lynch
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7 Responses to "Should you wait till market sentiments turn positive?"


Aug 3, 2013

Wondering whether the US and Europe are really recovering. It looks like they are just trying to cover up their interest on loans. They are not addressing the loans themselves. If so, All currencies have to keep deflating to pay off outstanding loans, if there is no default. That would mean ongoing inflation for India.

The point about being darkest before the dawn depends on fundamentals, doesn't it?


mohammad umar A. Kadiawala

Aug 2, 2013

I think this is the best time for long term investers even new investers to enter. According to my openion after observing 2yrs. One should go with strictly asset allocation basis investment .one should invest in large cap in the factors which in positive trend and allocate some fund in the same time in the script which is available in cheap by value. I.e. I am still holding and increasing in tata steel and observing such scrips which r available at attractive price and with high div. Yield. As well since its book value is higher than cmp. So keep investing with positive trend and invest their profit in good fundamentally attractive value stock.



Aug 1, 2013

According to Jim Rogers statement Indians are interested in doing fixed deposit not in the stock because most of the Indian Publics afraid to invest in stock because our Government, Politicians, bureaucrats not completely sincerego in the past they will drown the investors or make them Bhikari this is the practice in our country. See our RBI Governer was a gentle man he never reduce the interest rate our government was forcing them so I think he may not bent his bow and he may forcefully out. I will tell u an another story there was a big scam in Gujarth Suret during BJP regime a Cooperative bank story I personely knows that culprit at that time going to Delhi every week with a brief case to see the FM to escape from the trouble then how dare to invest in public.



Jul 31, 2013

I think the darkest portion of night as you mentioned will be around Dec./Jan.That will be the right time to pick up good quality stocks for LT.



Jul 31, 2013

"The answer is reforms to remove the structural issues that are plaguing the economy. It is crucial for the government to press its foot down on the reforms accelerator to drive growth for the future". ---This what you wrote.Can you pl indicate to me the specific reforms you have in mind and the benefits to flow into the economy??



Jul 31, 2013

YES b'cause govt/RBI is worried about face saving solution to prevent down fall of RUPEE at the cost of Growth. Positive sentiments are not likely to be in near future due to shortsightedness of policy makers.Even debt market/funds have not been spared from the fall. So you can well imagine the plight of the investors. Solution at the moment not to venture into anything(SHARES/BOND) except time tested risk free FD/PPF/NSC etc.



Jul 31, 2013

What investor can think as even investment in assets like Gold especially E-gold is giving a very different performance against Gold at MCX which earlier has around 1000/10 gram margin which turned 100/10 gram downside now this uneven move in already beaten safe heaven left no option than PSU FD for investors.

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