|»5 Minute Wrap Up by Equitymaster|
On This Day - 2 NOVEMBER 2009
Easy money has already been made in stocks
In this issue:
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October, however, was the first really down month for the markets since February. Herein, the BSE-Sensex came down by around 7% over September. However, despite this small decline, there is reason to think that the easy part of this bull-run is over. As we move towards the end of 2009, the markets wear a costume of boldness, but they're beginning to look tired.
This seems largely due to the fact that a large part of the rally since March has been on account of expansion in P/E multiples (see chart below) rather than any real improvement in Indian companies' overall financial performance. Sure, several companies have been able to improve profits in the latest completed September quarter, but a large part of it has been on account of cost cutting rather than any real improvement in sales.
We believe that easy money has been made in stocks over the past six months. The basis for this run was extremely low valuations of stocks - a factor that does not really exists now on a broader basis. It has really gotten difficult to find good quality stocks at attractive valuations. But that's not to say that some wonderful long term opportunities do not exist at all. They do, and it will require utmost care and discipline to identify them...on your part, and ours.
If you also feel so, one way you can get over the worry is to keep aside all noise of short term market volatility. Study and invest in good companies - those with sustainable businesses, ethical managements, and still available at attractive valuations.
A closer look reveals that a large part of that decline has been because of the energy sector as significantly lower crude prices hurt their topline growth. Other commodities like steel and aluminium have also played their part in denting the revenue performance of Indian companies. Going forward, a lot will hinge on how sustainable the economic recovery globally, and in India, is. In the long run however, we believe that the profit growth of the levels witnessed in the September quarter may not be sustainable and India Inc. should revert to its trend line profit growth of 12%-15% per annum.
Data Source: Equitymaster
At a time when the occupancy and rental rates are going down in the US, investors are seeking a higher return on their property. As such an anomaly cannot last for long. Ross believes that the US commercial property sales are set to fall to the lowest in almost two decades.
Ironically, leading business dailies have recently reported about such possibilities in India as well. Nariman Point, one of the oldest business hubs in Mumbai, purported to become the Manhattan of India, is now seeing a mass exodus of tenants. A new tax structure announced by the Municipal Corporation in April has pushed the cost of rents beyond the affordability of many businesses. Thanks to the economic slump driven cost cutting focus, most of these businesses have now decided to vacate their tony south Mumbai address in favour of more economical offices in other parts of the city. Newspaper reports say that owners of 3,000 office spaces in the area are now worried as tenants have already begun to move, with many others likely to follow suit.
"I regret to tell you that the recovery is liable to run out of steam and may even be followed by a 'double dip', although I am not sure whether it will occur in 2010 or 2011," says billionaire investor George Soros. He believes the IMF needs to be overhauled to prevent another crisis in the world financial system. He also believes that China would emerge as the big winner of the global crisis, due to its undervalued currency and a large trade surplus. He also believes that complete freedom of capital movement does more harm than good as it has become a source of instability.
We agree! Financial markets might provide liquidity, but people forget that it is a means to an end. Obsession with liquidity and suspension of common sense is at the root of several booms and bursts.
Around the world, central banks are paring emergency measures taken at the height of the financial crisis. And this is sending out signals that the stimulus would be withdrawn soon, thereby sending jitters across global stockmarkets. India's RBI also hinted something like this last week as it tightened credit norms, especially for the bubbly real estate sector. However, in contrast, we recently heard Dr. Montek Singh Ahluwalia, deputy chairman of the Planning Commission, as saying - "For the present, there's no case for doing anything other than continuing the stimulus. It'll be a mistake to think that the world economy has recovered."
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