Over the next 3 Yrs, stock markets will return... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Over the next 3 Yrs, stock markets will return... 

A  A  A
In this issue:
» Get ready for a much lower return from stock market
» Is the real estate market coming back to life?
» Roubini moves from 'W' to 'U' shaped recovery
» IPOs falling flat on the face
» ...and more!!

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00:00  Chart of the day
If you are expecting to achieve super normal returns from the stock markets over the next three years or so, it's perhaps time to temper that optimism a bit. As the chart below shows, at the current dividend yields of the Nifty, the benchmark may give the investors an average return of 12% CAGR in the next three years. Investors have been able to make their best returns with a portfolio that exactly mirrors Nifty stocks when the index has traded at a yield of between 2.6% and 3% between 2000 and 2006. Even dividend yields between 2.2% and 2.6% have given very attractive returns over a three year period. The worst returns have come when the benchmark has traded at a yield between 0.8 and 1.14%, returning in the negative.

Interestingly, at its peak in Jan 2008, the index traded at a yield of 0.8%, an indication that the markets were overvalued. And on 9 March 2009, when the index touched its recent lows, the dividend yield showed a reading of 2.2%, which meant more than 30% average returns per year over a three year period! You may have just learnt one of the most important charts in making far more reliable estimates about future market returns. We say far more reliable because unlike earnings and book value, dividends don't lend themselves to large scale abuse.

Source: NSE, India

The last time a slowdown happened in the Indian <>real estate industry, it took the industry as much as five years to recover from the blow. But if a story in Mint is to be believed, the current slowdown is perhaps already breathing its last few breaths. In other words, there are telltale signs that real estate prices in select pockets are inching upwards. None more so than in the affordable housing space. Despite the big real estate players shifting their priority towards affordable housing in the aftermath of the crisis, demand may comfortably outstrip supply over the next few years, thus putting upward pressure on prices. In fact, some developers are already saying that prices may bounce back to the peak levels of 2007.

Although there seems to be huge demand for affordable housing, it remains to be seen whether the developers are being realistic or are deliberately creating stories of scarcity to lure people into buying homes. If our founder Ajit Dayal is to be believed, it is more a case of the latter as he is of the opinion that real estate projects under construction are probably 5x what the actual demand will be at the price points being currently quoted. It does not take more than a few seconds to realize whose vested interests are at stake and hence, who is more prone to fabricating a lie.

IPOs in India had taken a considerable beating last year when the global financial crisis deepened and stock markets plunged. However, despite signs of recovery being evident of late and global indices including India rallying, the response to IPOs has at best remained tepid. Investors, having burnt their fingers badly when the meltdown happened, are now vary of these IPOs being priced steeply and many are not looking to invest for listing gains and very rightly so.

Infact, as reported in a leading business daily, three of the four IPOs listed in August this year are trading below their offer price including Adani Power and the recent NHPC. What also seems to have impacted IPOs is a ban on derivatives trading on IPO stocks for the first six months. IPOs were the in-thing before the crisis unfolded when money (some of it borrowed) was poured into these public issues even when the underlying companies did not have sales or assets to speak of or if the revenue potential was some distance away. Not anymore!

We are back to lazy banking, if you wish to put it that way. Lazy banking implies banks doing their primary job of lending money at an unusually slow pace. As per the RBI's latest bulletin, the banking system has about Rs 3,000 bn of surplus funds parked partly with the RBI and partly with mutual funds. While it goes without saying that these are not the ideal destinations for these funds (due to their relatively poor yields), the banks have few options. Despite an economic revival, credit offtake remains feeble and has grown barely 15% YoY so far in FY10. As against this, deposit growth was healthy at 21% YoY during the same period. While you may be wondering if banks are making a killing in the bond markets - that is not exactly the case.

The surplus liquidity is not flowing towards government bonds as well because banks are reluctant to take mark-to-market positions owing to worries over rising bond yields (or falling prices). The reason why banks have chosen to park excessive liquidity in overnight instruments is because they view the liquidity situation as temporary and are anticipating a hike in CRR, SLR to suck out liquidity as inflation rears its head. While this has been overdue for sometime, the RBI's monetary tightening is also expected to work well in terms of pricing and margins for the banking sector.

As per Bloomberg, there appeared unanimity among finance officials of the G20 nations on a plan that would alter bonus structures of banks and force lenders to hold more capital to make them more crisis proof. "We have broad agreement on a very strong set of principles and objectives for building a more stable global financial system. We need to move now to put that framework in place," this is how Tim Geithner, the US Treasury Secretary chose to put it across.

While the developed nations, most of all the US have indeed shown the right intentions, the question remains that how many of the new rules and regulations will find their way into the rule book for US banks. The US banking industry in recent years has become a very powerful entity and there have been widespread allegations that they do manage to pull a lot of strings in Washington. Whether they succeed in scuttling this latest attempt that seeks to curb their animal spirits and aims to bring their compensation structure in line with other industries, remains to be seen. If they don't then that would indeed mark the beginning of a new era of the global financial system.

A late surge in monsoons seems to have rekindled hopes that the growth in India's GDP this fiscal may not be that bad after all. As per a leading daily, the rainfall in the country over the past week has been 4% more than normal with even regions like Haryana, Punjab and Delhi that till the start of September had witnessed very scanty rainfall witnessing some sort of improvement. And with the spurt likely to continue over the next week or so, there could be notable improvement in the crop production in the country and also the income of rural India.

It should be noted that a couple of weeks back, with weak monsoons as the backdrop, India's planning commission had projected a worst case scenario GDP growth of 5.5% for the current fiscal. A far cry from the 6.7% growth that we managed to achieve for the year ended March 09. Now, with monsoon deficit expected to come down, the number will most likely be revised upwards in the region of 6%-6.5%.

Recently, Nouriel Roubini predicted that the world economy faces "a rising risk of a double-dip W-shaped recession. A double dip recession means growth rates start to improve and but then peter out again. Now he has modified his prediction, admitting that a U-shaped recovery is possible. It will take about 3 years for the leading economies to get back on track.

However, he warns that if "we don't get the exit strategy right we could end up with a relapse in growth ...a double-dip recession," It may be noted that of late several credible voices have cautioned that investors are getting too optimistic and drawing cheerful conclusion from negative data. Given that Nouriel Roubini was among the very few who predicted the scale of the global financial meltdown, it makes sense to listen when he talks about the broader economy.

If one were to go by Bloomberg report, investors seem to have developed a preference for bonds and a consequent aversion to equities despite what the rising trend of markets the world over suggests. According to the report, investors withdrew a net of US$ 4.95 bn from equity funds, and added US$ 5.06 bn to bond funds in the week ending September 2. Concerns about high valuations of stocks despite continued macro economic uncertainty is what seems to have triggered this shift. Some of this concern is surely justified considering that certain stocks in the Indian markets too have become dangerously expensive, breaking even their January 2008 highs recently.

Meanwhile, led by international as well as domestic cues, Indian markets were trading strongly in the positive at the time of writing this, with stocks from the auto and metals pack leading the list of gainers. While stocks across Asia have ended strongly today, Europe is also witnessing significant buying interest currently.

04:56  Today's investing mantra
"The current cry is for 'independent' directors. It is certainly true that it is desirable to have directors who think and speak independently - but they must also be business-savvy, interested and shareholder oriented." - Warren Buffett
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7 Responses to "Over the next 3 Yrs, stock markets will return..."

Col K S Rana

Sep 9, 2009

Dear Sirs,
Equitymaster is indeed informative and a very methodical analyser. Its balanced approach towards markets and research work is noteworthy if one wants to invest in stocks and multiply the hard earned money. Kindly keep on doing the good work.



Sep 8, 2009

Dear sir,This is the best and informative regarding stock markets.I am reding regularly and also following the techniques.



Sep 8, 2009

please,send investment scrips may be double in twoyears.



Sep 8, 2009

Realty sector will find novel ways to encassh the situation. already Builders are knocking at the gates of the secretariat of the Tamilnadu Government to work special residential zones for the BPL households.
This cue may be taken by others also.
Regulator may not set his foot in such a residential zone.So there is going to a be special SW monsoon session for the builders.



Sep 8, 2009

Hi Equitymaster team,

I find the market valuation approach covered in the 'chart of the day' (nifty returns at different div. yields) to be very unique(people only talk about PE ratio all the time) and it makes lot of sense. It reflects value based on the latest 'real' earnings and I really urge you folks to publish this chart periodically (say every month) so that the readers can use this information to guide their investment decisions.



Sep 7, 2009

Regarding Real Estate sector, My opinion is that there is no likelihood of the Property Prices going back to 2007 levels atleast in the next 5 years.Refering to all the Big Projects of big players like say DLF, UNITECH,HIRANANDANI where there are are more than say 500 apartments in a block the Projects launched in 2007 are still not booked.IN fact all these huge projects, 80 % of the investors are speculators who thought they will make atlest 20 - 25 % immediately on allotment like the good old days when people book with Rs 250 for a Bajaj Scooter and on allotment make a cool RS 2000 - Rs 3000 on allotment). There are less than 20 % who are the end users .Now the speculators have failed to get back even the full booking amount, leave alone the Premium.The Builders too have not been transparent in the deals . THe supply far outstrips demand .
Another serious issue of the real estate sector is that the so called Land banks of several thousand acres held by the big real estate builders,(let us remember that most of the land is agricultural land and the builders have no approval for residential/Commercial Projects )what is the original cost, and what is the present value and most interesting is how much is mortgaged to the bank and what is the loan outstanding?.it will also be interesting to know whether the banks who have lend money to the real estate buildres , whether their loan is fully covered by the value of the so called land bank at todays value.
i see a REAL ESTATE sector - few Private sector banks nexus (RBI and Govt are conspiquously silent)and I am forseeing a big bubble exploding in the forseeable future . Real esate sector one may see gains here and there on short term basis , but on medium to long term one should avoid this sector.I would appreciate the Government appointing a strong Regulator for a clean , Healthy and Transparent Real Estate Sector



Sep 7, 2009

hi sir this is very nice info regarding stock market .i am very interest to learn all this type of techniques.

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