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Is this your reason to buy stocks?

Dec 14, 2009

As we approach year-end, it would be helpful to share a quick recap of 2009. Global stock markets, gold, oil, hard commodities - you name it and it rose in value during the year. Emerging markets were clearly the outperformers though. Stock indices of China and India for instance rose by around 78% each.

Note: Country names are representative of their benchmark stock market indices
Data Source: Yahoo Finance, CNNfn, Kitco

We believe that the main driver of 2009 rally across asset classes (except gold) were low US interest rates. Gold prices rose primarily due to fear of the events that such low rates can unfold in the future (like high inflation). Set around a year ago at near-zero level, these rates forced flow of liquidity into emerging market assets, including Indian stocks.

As of date, foreign inflows into Indian stocks have already totaled US$ 16 bn this year. And with interest rates in the US expected to remain low (as has been talked about by the Fed) for an extended period of time, the flow of foreign money is likely to continue into 2010 as well.

So, could that be one big reason to buy stocks into the new year?

We believe, no!

Foreign investors are notoriously unpredictable. They were the same set of investors who dumped assets in the emerging markets in 2008 to move into the safety of US bonds. And now with risk coming back on the table, as money has become cheap, it is this very set of investors that are firing up stocks across emerging markets like India.

We can't yet term 2009 FII inflows as a pointer to some kind of bubble building up in Indian markers. But what these have definitely done is taken stocks' valuations to uncomfortably high levels. When we look around for some very good businesses in India, we find their stocks are now trading at rich valuations.

This is what disturbs us. Especially when we know that the large but unpredictable foreign investors have the power to pull the carpet under our feet. Anyways, when that happens, those with the stomach to look for bargains may have a field day. But the vast majority of retail investors might get severely burnt. After all, this is what happened last year as well!

So the big idea for you is to not go by what the foreign investors are doing. Rely on your own understanding of businesses you invest in, and be there for the long term.

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