Where to invest in 2009 - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster

Where to invest in 2009 

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In this issue:
» Where to invest in 2009
» Stars that turned paupers in 2008
» ...and more!!

Where to invest in 2009? This question is pertinent now more than ever before in the recent past for both sets of investors. One, which was smart enough to pull out money from stock markets at the end of 2007 and is currently waiting in the wings looking for an opportunity to reinvest. And also the other, whose portfolio currently is mired in losses and wants to make a fresh start. Thus, considering the importance of the question, we tossed it up to one of India's finest fund managers, Mr. Nilesh Shah. But before we listen to his answer, a short introduction of Mr. Shah is in order.

Mr. Nilesh Shah, Deputy Managing Director of ICICI Prudential Asset Management Company Limited, joined ICICI Prudential AMC in June 2004. He is a gold medalist Chartered Accountant. He has valuable experience of over 15 years across the banking & financial services sector. He heads the investment function for all businesses, and is responsible for fund management and investment philosophy.

Here is what Mr. Shah has to say on his outlook for 2009 for the Indian stock markets.

1. Lessons from 2008, for 2009
The events of the last year clearly brought to focus the importance of informed and planned decision making. Investors taking cue from the past year should remember that following the trend without fundamental analysis will only expose the portfolio to unwarranted risks. Investors thus need to evaluate investment decisions and take prudent calls based on long term growth outlook. Due diligence on quality of papers where their monies are being invested, access to information and transparency standards followed by organizations should form the basis of investment decision.

Further prudent planning of portfolio allocation and diversification is key to ensure risk-adjusted returns. Prudent portfolio planning will ensure that languishing performance of one asset class will be more than compensated by the good performance of another asset class.

Lastly, do not get carried away by speculation and maintain rationality in return expectations. The focus should be on optimizing returns rather than maximizing returns. By ensuring that investment decisions are based on fundamentals like investing during every market correction, investors can successfully achieve the objective of long term wealth creation.

2. Where to invest in 2009?
The first half of 2009 is expected to take advantage of the drop in interest rates. We expect defensive sectors like FMCG, healthcare, consumer articles related sectors and select telecom companies to do well.

Over the second half of the year, depending on how the global situation pans out, sectors like commodities and infrastructure could witness improvement. This apart, inventory based sectors like auto, petrochemicals etc. could do well in the second half after the one time inventory losses are booked over the next 6 months.

3. When with the Sensex reach its all time high of 21,000+ again?
It is difficult to predict when the market will reach past highs of 21,000. However, over the three to five year horizon we expect markets to recover the most part of its lost glory. The important point to remember is that investors have to invest in the current market scenario where valuations are attractive, market cap to GDP ratio stands significantly corrected, Indian growth rate is much higher than the global average, the Indian financial system is sound and fundamentally stronger than the global financial system and the domestic consumption pattern stands strong. Also India has a savings and investment rate of more than 30%, which is capable of supporting 7%-plus GDP growth in the coming years. Foreign direct investment will help in accelerating growth but even without the same base, growth will continue.

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The stars of 2007 - realty, capital goods and power - turned paupers in 2008. Stocks from these sectors lost 70%, 80% and even 90% during the past 12 months. These were the worst hit during 2008 largely on account of the severe liquidity crunch faced by the Indian economy. Slowdown in industrial capex and consumption demand also led to pressure on these sectors. Not to mention the bubble that had built up in these by the end of last year.

Source: BSE

Here is Equitymaster's outlook for 2009 on the five worst performing sectors of 2008 realty, metals, capital goods, power, and auto.

Realty: The worst performer among BSE indices, the realty sector grabbed headlines throughout the year, and most often for the bad reasons. From slowdown in demand for residential, commercial and retail properties to crash in prices, to funding crunch, the sector faced strong headwinds throughout the year. While end of year measures like reduction in interest rates and softened bank lending norms for real estate projects might see the sector repair some damage in 2009, times are expected to remain tough and property prices are expected to fall further to capture the shortage of demand over supply.

Metals: The demand for metals like steel, aluminium and copper across the world is expected to grow at a tepid rate during 2009 mainly on account of piled up inventories in certain industries and slowdown in consumer industries. However, India will continue to consume greater amount of steel and aluminium on account of huge investments in infrastructure and power sectors. The prices for the metals are likely to remain subdued. However, the margins of companies are expected to remain stable on account of decrease in the prices of key raw materials. The stimulus packages announced by the Chinese and Indian governments will keep the demand for certain metals like steel and aluminium growing in the region.

Capital goods: This sector has faced strong headwinds during 2008. We believe 2009 is not expected to be any better. The key issue plaguing the sector is that its growth depends a lot on the capex cycle of industries, which is on a downturn, chiefly owing to slowdown in demand and funding issues. We believe that the situation will take a while to improve for engineering companies, despite the fact that they already have large order books to support growth for the next few quarters. We saw some initial signs of project delays, postponements and cancellations in 2008. We believe things will become worse before they get better for the sector. Implementation of the stimulus package will however be a bright spot for the industry during 2009.

Power: The beginning of 2008 marked the bust of excessive valuation for power stocks, which had been among the top performers in 2008 led by hype surrounding mega projects. The 'fall from grace' occurred after the failure of Reliance Power's IPO. As per the CMIE, during the January-September 2008 period, just around 4,460 MW of incremental capacity was added. This was against around 16,000 MW that the country needs to meet the 'power for all' objective by 2012. The problems for the power sector were compounded by volatile fuel prices and project funding issues. These issues we believe are expected to hurt the sector's growth in 2009 as well. While the need to set up large scale power capacities will act as a positive force behind the sector's growth, how much of this need is actually turned into implementation remains a question.

Automobiles: Despite recent round of price cuts, car makers, by their own admissions, are in for a tough 2009. In fact, they are arguing that FY09-FY10 will turn out to be one of their toughest periods ever, and not without reason. Despite rapid growth in recent past, car is still considered to be a luxury rather than necessity. And people do not indulge in a luxury spending when the economic environment is not all that reassuring. Furthermore, interest rates have not turned as enticing yet. Thus, it will be difficult to argue for a growth rate of more than mid-single digits even in a best case scenario for 2009. Long term though, India remains one of the best growth stories thanks to rising income levels and improving infrastructure.

04:49 2009 investing mantra
"When stocks are attractive, you buy them. Sure, they can go lower. I've bought stocks at $12 that went to $2, but then they later went to $30. You just don't know when you can find the bottom." - Peter Lynch
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