This could start a correction in markets... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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This could start a correction in markets... 

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In this issue:
» Failure of a realty IPO can hurt broader markets
» Property prices remain high...so what can you do?
» Where does the future for gold lie?
» Jim Rogers' view on the yellow metal
» ...and more!


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00:00
 
If you believe that neither the tantrums of the weather gods nor muted corporate earnings reports nor strained economic variables can topple the meteoric rise in the Sensex, this argument could change your views. "Real estate could be the lynchpin for the equity markets and a failure of a large initial public offering could start a correction in the market." These are not our views but of a person who is one of the most revered voices in real estate and heads the largest mortgage financing company in India. Yes we just quoted the words of HDFC Chairman Mr. Deepak Parekh. Reason enough for investors to acknowledge that his assessment of the real estate market cannot be further from truth.

Cut back to late 2007/early 2008 and one can recall large real estate players seeking billions of rupees from the IPO markets on the basis of the valuation of their 'land banks'. Ignorant investors were cajoled into subscribing to these issues on the hopes of supernormal listing gains. Many investors fell into the trap without a careful analysis of their leveraged balance sheets. However, by late 2008, most of these real estate players were struggling to carry the weight of their debt and all the euphoria around their land banks had fizzled out. But as they say - Old habits die hard!

Real estate companies are back at it again seeking billions from the IPO markets, hoping that investors have a short memory. Thanks to veterans like Mr. Parekh, you can get to see the 'real' picture!

Data Source: Trend

01:12
 
'Homes still out of reach of buyers' screamed one of the headlines in a leading business daily. The reference was apparently to the recently held Mumbai Property Exhibition. A couple of visitors that the paper spoke to had more bad news to offer. "Property prices may have come down but even today, the prices quoted by sellers are too high," complained one of them.

Indeed, if greedy real estate developers, instead of getting punished for their misdemeanors, are being rescued by banks, they will not change their stripes in a hurry. And they are back to doing what they do best, bid up home prices.

So, will owning your dream home at a more 'real, affordable' price remain just that, a dream? Maybe not. Ajit Dayal, the founder of Equitymaster has come up with a unique solution. He is of the opinion that you needs to walk up to your bank's branch manager and tell him that you wish to give your deposits to a bank that only gives real estate loans to individuals who buy homes or offices or shops?

This audacious but small effort on your part (and other individuals' part) could perhaps force real estate developers to sell their flats at reasonable prices in order to pay back the debt that they owe to your bank. And then, not you but perhaps thousands of other middle class Indians can have the house that they always dreamt of.

02:14  Chart of the day
Today's chart of the day shows a comparison of the P/E of select BSE indices as these stand today compared to what they were a year ago. And the contrast is stark. While P/E of all these indices were at their lows on October 2008 for obvious reasons (we were at the peak of fear of a global recession and credit crisis), the way these have moved up over the last few months draws much concern..

Note: CG-Capital goods, HC-Healthcare, O&G-Oil & Gas
Data Source: CMIE Prowess

Proponents of a bull run are all making the case of a much improved corporate performance in the September quarter. But this seems a bit farfetched. The earnings outlook is far from rosy. While June quarter performance was driven by operational leverage in the form lower raw material and interest cost, we do not see this sustaining going forward.

Ultimately companies have to grow sales to grow their profits, which seems tougher to achieve in the current environment, at least if we are to go by our recent interactions with companies across sectors.

02:58
 
Gold prices are up sharply again, as these are trading at US$ 1,056 an ounce, up US$ 12 over yesterday's close. This is the third consecutive day on which the yellow metal has gained strongly. These gains are being driven by mounting concerns that the US dollar, the world's reserve currency will lose value on the back of US government's money printing exercise.

So, where does the future for gold lie? Remember, it has already surged by around 13% this year (in rupee terms).

It must be noted that the turmoil in the global financial system has led to the central banks around the world flooding the market place with trillions of printed money, giving rise to concerns of hyperinflation. While inflation not raised its head just yet, it is only a matter of time and hence, we believe that gold may be one of the best bets around to nullify the effects of the same on your portfolio.

And although gold prices have moved up sharply in the past few years, many experts (like Jim Rogers, as you will read below) are of the opinion that it may go significantly higher even from the current levels and hence, it may not be too late for one to enter.

In fact, here is what Mr. Ajit Dayal, the Director and President of Quantum Asset Management Company as well as the founder of Equitymaster, has to say on gold, "Keep buying, it is a great hedge just in case the world stays in trouble - or inflation gathers steam."

04:01
 
Now while the world is gung-ho about the yellow metal, Jim Rogers, one of the best commodities investors the world has ever known, is wary of buying it at the current levels. While he sees further gains in gold in the long run, his belief is that the metal is currently trading at record prices and thus there is no strong fundamental reason for him to go long on the same. "I am not jumping on board," says Rogers, whose bearish views on the dollar and bullish views on commodities and China have been widely broadcast for years.

Rogers however adds, "I can't say what will happen to gold tomorrow or next month. But if you ask me whether gold will go up in the long term, maybe in the next decade, I would say yes."

04:34
 
Indian markets had another strong day today with the BSE-Sensex trading higher by around 80 points (0.5%) at the time of writing. Mid and smallcap stocks also recorded more or less similar gains. Within sectors, the FMCG and realty packs led today's gains while selling pressure was seen in IT stocks.

Among other Asian markets, China (up 0.9%), Hong Kong (up 1.2%) and Japan (up 0.3%) led the gainers' pack. European markets have also opened the day on a positive note.

04:54  Today's investing mantra
"Value investing ideas seem so simple and commonplace. It seems like a waste to go to school and get a Ph.D. in economics. It's a little like spending eight years in divinity school and having someone tell you the Ten Commandments are all that matter. " - Warren Buffett
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12 Responses to "This could start a correction in markets..."

bhavesh soni

Dec 10, 2009

when it ll start correction

Like 

B. Konwar

Oct 9, 2009

need some good high return potential small cap

Like 

gg

Oct 9, 2009

In a recent column, I believe Ajit recommended that 15 to 20 per cent of your portfolio should be gold, and you could accumulate this by buying in equal installments over 12-15 months rather than in a lump sum - to benefit from rupee cost averaging

"keep buying" is a bit of a hyperbole, no?

Like 

Pavan

Oct 9, 2009

Echoing Sumnatra's comment.
Please update your phrasebook.
"farther from the truth" in below statement implies that what is being said is untrue?
This is the second time the phrase has been used incorrectly in the last week.

These are not our views but of a person who is one of the most revered voices in real estate and heads the largest mortgage financing company in India. Yes we just quoted the words of HDFC Chairman Mr. Deepak Parekh. Reason enough for investors to acknowledge that his assessment of the real estate market cannot be further from truth.

Like 

Shanti Kumar Damani

Oct 9, 2009

Please also give the IPO price of the realty stocks , the high they have touched (and at that price what were the P/Es) and the low they have touched now. their P/e ratios now.
Many thanks - damani

Like 

bas

Oct 8, 2009

excellant analysis

Like 

Sumantra Nag

Oct 8, 2009

Please refer to your statements:

1. '"Real estate could be the lynchpin for the equity markets and a failure of a large initial public offering could start a correction in the market." These are not our views but of a person who is one of the most revered voices in real estate and heads the largest mortgage financing company in India. Yes we just quoted the words of HDFC Chairman Mr. Deepak Parekh. Reason enough for investors to acknowledge that his assessment of the real estate market cannot be further from truth.'

When you say " Reason enough for investors to acknowledge that his assessment of the real estate market cannot be further from truth...." the meaning being conveyed is that what Mr. Deepak Parekh is saying is far from the truth, i.e., that he has got it wrong. Is that what you mean? If not, then please check the wording of this statement.

2. "Real estate companies are back at it again seeking billions from the IPO markets, hoping that investors have a short memory. Thanks to veterans like Mr. Parekh, you can get to see the 'real' picture!"

This confirms that, in your view, Mr. Deepak Parekh has got the right assessment.

But that contradicts the statement, "... his assessment of the real estate market cannot be further from truth", which implies that Mr. Deepak Parekh's assessment is far from the truth.

Please do check the use of your statement "... his [Mr. Deepak Parekh's] assessment of the real estate market cannot be further from truth..."

Regards

Sumantra Nag

Like 

nandi

Oct 8, 2009

excellent

Like 

VIMAL MEHTA

Oct 8, 2009

Hello..just a correction...the chinese markets were not up by .9% (as mentioned) as they have not traded since 30-9-2009. They resume trading tomorrow after a 8 day trading holiday.

Like 

vibhor anand

Oct 8, 2009

This is surprising to see gold prices and stock markets in green simultaneously. Can we expect the gold prices to rise further or stay stable in the near future? Or Is the selling activity in gold palpable considering the markets are performing reasonably good?

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