The markets next move is 50% - The Honest Truth By Ajit Dayal
Investing in India - Honest Truth by Ajit Dayal
The markets next move is 50% A  A  A
8 JUNE 2009

The Indian stock markets have been on a roll.
And everyone wants to know: what next?
Will the market surge +50%?
Or will the market lose -50%?

The BSE 30 Index was stuck in the 8,000 to 10,000 range for 5 months between October 2008 and March 2009. At the 8,000 levels many mutual fund managers and individual investors did not invest. They believed the market could slip to 6,000.

When the market hit 10,000 (5 times in that 5 month period) everyone believed that it was on its way to 8,000. They were right 4 times - each rise of the market resulted in a sharp decline (see Graph 1).

------------------------ Stock markets are on a tear... ------------------------
Beware of enthusiastic TV anchors and unscrupulous brokers!
This is the time to lay the foundations for a wealthy future. Not the time to speculate in momentum stocks.
Our recommendation - go out and invest in blue-chip stocks that are available for dirt cheap.
To know how you can go about picking the right stocks for your blue-chip portfolio, read on...


Graph 1: The bankruptcy of Lehman on September 15, 2008 forced the markets into a downward spiral…we are back where we were before that event.
Back to the level as before the September 15, 2008 bankruptcy of Lehman Brothers
Source: Bloomberg

But, after breaking the 10,000 barrier in March, the market marched on relentlessly to 12,173 on May 15th - the last trading day before the election results.

This rise was so rapid - and against the mainstream thinking - that most people were left out. In fact, many lost money by going "short" - betting that the markets would decline.
Many predicted that Mayawati (uh, remember her?) would be the queen bee and Karat (another name from prehistoric India) the king. That was the assumption for the Index to head all the way down to 6,000.

Now there is no Mayawati or Karat to upset the national political equations. The Index has surged - and after 13 successive weeks of gains - stands at 15,104.

This is 85% above the low of 8,160 reached on March 9th, 2009.

Not only has the uncertainty of a Third Front government been removed, but global capital is willing to take "risks" again and foreign investors are buying India.

Fool's gold
But is India repeating the mistakes we made in the years 2006 and 2007?

There were a few problems with the surge of foreign buying which the Ministry of Finance was blind to. The RBI, to its credit, did send out warnings. But central bankers are treated like the headmaster: every "No" should be defied.

The first problem was much of this USD 17 billion of foreign money that came into India in the year 2007 was mostly speculative money. Not long term capital that large pension funds invest with a 10 year and 20 year time frame. But quick, in-and-out money that hedge funds were happily gambling with. The swine flu of the western capitalist society had invaded India.

The second problem was that this "hot" money was, in many ways, creating a self-fulfilling prophecy. The USD 17 billion that came into India in the calendar year 2007 began to fund highly irrational ventures - like this concept of land banks accumulated by various real estate developers. But the injection of this money itself made the irrational, look rational. Every barren piece of land stolen from illiterate villagers was seen as a glossy township with billions of dollars of future cash flow.

Money illusions can hide the reality underneath - for a while. A surge of liquidity gives the false impression of stronger fundamentals.

Banks like ICICI Bank can get more funding and they grow larger - but they grow larger doing the same thing. ICICI was famous for lending to gain market share - with a flawed risk assessment. Just because they got more foreign money to grow, did not mean they were doing the right thing.

Or take a Pantaloon - rushing to open malls as if every Indian had buckets of cash to spend every weekend.

Or a Tata Motors, buying Jaguar and Land Rover for future technology - and being able to do so because money was cheap.

The third problem was that, when India did actually face a threat and problem from the global economic crisis and financial meltdown, the policy makers were caught with no clothes. They were naked and devoid of any ability to act. India had not built a sufficient set of counter-cyclical actions to offset the negative global economic environment. Because, like hedge fund managers, our policy makers had focused on the quarterly performance of our economy and the stock markets. So, when the global crisis hit - India, one of the lesser affected economies - was one of the worst hit stock markets in the world.

The foreign gamblers (P-Note holders) scrambled for shelter and sold every share that could be sold. Our government and policy makers were like timid deer caught in the glare of spotlights: frozen and unable to do much. To be fair, the fact that we were to hold a general election limited their ability to act rapidly.

A market that can reach a new peak
Now with the elections behind us, the policy makers can act.

The Indian stock markets wobbled from their January 2008 peak largely because of the fears of inflation. The price of commodities including oil and wheat had surged. India was seen to be a victim of a high inflation environment.

Graph 2: A fall from a peak of 20,873 on January 8, 2008....can we get back there?
A fall from a peak of 20,873 on January 8, 2008
Source: Bloomberg

The horizontal line across Graph 2 is the 14,000 level of the Index. If oil had stayed at USD 100 plus; if wheat, rice, and all the other commodities had stayed at their peak levels for a year - one can argue that the market would have fallen by, say, -50%. From its 20,873 peak to a 14,000 level.

But the markets fell to 8,000.
After September 15, 2008 when Lehman went bust.
That is because the foreign hedge funds went scrambling back home with their cash.
And there was no buyer to absorb their vicious selling.
The P-Note holders whacked us on the left cheek; the government offered them all our right cheeks.

Inflation is not a threat to India - or to anyone in the world.
And foreign speculators are rushing to buy back into India: into a politically stable India.

The budget is the next trigger
The election of this new government was the trigger to move the market from 12,000 to 15,000.

The budget to be presented in early July will decide what the markets will do in the next few months.

A "bad" budget will bring the market back to the 14,000 levels.
A "good" budget could take it above 16,000 very comfortably.
A "revolutionary" budget will make it head to 18,000.

And, if companies report better-than-expected profits for the quarter ending March 2010, the market could be at a new peak - irrespective of the budget.

So, if you missed putting new money into the stock market when it rallied from 8,000 to 15,000 - you can still invest. Buy steadily over the next few weeks; not in one shot.

But recognise the inherent ability of stock markets to surge and slump at very short notice - and for very few real reasons.
Moreover, the economic crisis in the world has still not disappeared, though the Indian economy seems even more immune to it today than it did in October 2008.

My advice stays the same: keep aside enough money in "reliable cash" to maintain a lifestyle that you enjoy for 6 months, 12 months, 18 months, or 24 months. That is a function of how you can handle sleepless nights caused by market swings.

Everything else - the money you have left after that - should be invested 80% in equity and 20% in gold.

It is not fun to know that you missed an 85% surge in 5 months. But there is a possibility of a 50% gain in the next 12 months.

Suggested allocation in Quantum Mutual Funds (after keeping safe money aside)
Quantum Long Term Equity Fund Quantum Gold Fund
Quantum Liquid Fund
Why you
should own
An investment for the future and an opportunity to profit from the long term economic growth in India A hedge against a global financial crisis and an "insurance" for your portfolio Cash in hand for any emergency uses but should get better returns than a savings account in a bank
Suggested allocation 80% 20% Keep aside money to meet your expenses for 6 months to 2 years

Disclaimer: Past performance may or may not be sustained in the future. Mutual Fund investments are subject to market risks, fluctuation in NAV's and uncertainty of dividend distributions. Please read offer documents of the relevant schemes carefully before making any investments. Click here for the detailed risk factors and statutory information"

Note: The Honest Truth is authored by Ajit Dayal. Ajit is a Director at Quantum Advisors Pvt Ltd and Quantum Asset Management Company Pvt Ltd.. Views expressed in this article are entirely those of the author and may not be regarded as views of the Quantum Mutual Fund or Quantum Asset Management Company Private Limited. To write to Ajit, please click here.

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17 Responses to "The markets next move is 50%"


Oct 9, 2009

it seems the market will steablise one can stay with 10% stop loss and 20 % to book profit in 50% of stock


vivek kumar gujrati

Jul 27, 2009

economic growth is high, but stock valuations are even higher. In 2008, as U.S. stocks fell 37.6%, emerging markets crashed 53.3%, according to MSCI. At year end, emerging-markets stocks traded at a 38% discount to U.S. shares, as measured by the ratio of price to earnings. Now that both markets have bounced back, emerging markets are at only a 21% discount. And make no mistake: They should be much cheaper than U.S. stocks, because they are far riskier.

"The logical fallacy is the same one investors fell into with Internet stocks a decade ago," says finance professor Jay Ritter of the University of Florida. "Rapid technological change doesn't necessarily mean that the owners of capital will get the benefits. Neither does rapid economic growth."

High growth draws out new companies that absorb capital, bid up the cost of labor and drive down the prices of goods and services. That is good news for local workers and global consumers, but it is ultimately bad news for investors. Last year, at least six of the world's 10 largest initial public offerings of stock were in emerging markets. Through June 30, Asia, Latin America, the Mideast and Africa have accounted for 69% of the dollar value of all IPOs world-wide. Growth in those economies will now be spread more thinly across dozens of more companies owned by multitudes of new investors.

The role of emerging markets, says Prof. Dimson, "is to provide diversification, not to add to returns." Having up to 15% of your total U.S. and international stock assets in emerging markets can make sense. But before you jump in with both feet, look at the holdings of the international funds you already own; many keep at least 20% of their assets in developing markets.

Like all performance chasing, this latest investing binge is doomed to disappoint the people who don't understand what they are doing.



Jun 21, 2009

The market jumped due to P-notes & FIIs pumping in the money. But for how long will these FIIs continue to pump their money? The economic crisis is yet to be over. There exists a possibility that by pumping in more money by FIIs the market goes up & then these FIIs sell off to make profits to compensate for the loss elsewere. No market is good when it is driven not by domestic investors but FIIs.
Who knows, we may see a +50% or even a -50% from here.


sandeep agarwal

Jun 19, 2009

Sir,I read your column quite often as it among the few sources of logical and consistent analysis. In this analysis of yours i have a few arguements which prevent me from reconciling to a 50% return in 1 year time. The current Nifty PE as given on nse website is around 20. The long term average PE for Indian markets is around 14-16 (even for US the long term average is around 16). If the markets have to increase by 50% in a years time then either the PE has to increase by 50% or earnings have to increase by 50% or it has to be a combination of both. A PE increase of 50% would take it to 30 which is purely speculative. An earnings increase of 50% seems highly unlikely in current environment. A 15%-20% increase appears more likely, in which case PE ratios have to increase by another 30% or so for a 50% increase in sensex. If i am missing out on something then i'll be happy to recieve a feedback on this rather crude analysis.


Ashok Chaudhary

Jun 18, 2009

This market doesn't and has never run on technicalities or fundamentals and it has been proven umpteeen number of times. for e.g. when u are going uphill to visit a site, a cell phone from your boss would ask u to come down on an urgent basis for some work and u come down....but if u are smart u say, i will visit the temple and come down if it delays the that's it, some foolish funding bank has reaped 10-20% and they let go a sell order and ooh la-la the stupid indians go down the hill in the herd why did the markets rise and fall is theory of absurdity......from where else in this whole world can the mutual funds or banks rasie money at 10-15% in a week or's the Indian Sensex at the cost of our industry adn retail play smart and play as per fundamentals.......see the book orders and not the CEO's stylish suits......these fellow only waste company profits by they jet more the company's presence int he advertising domain the more sick it will become a year later...remember the US sneezed in late 2008, the fever will creep in into India only in 2010....and what about the black money flowing from foreign tax havens into the stock market to make it all white......



Jun 17, 2009

50% upward move is a distant dream. The budget will not be extra ordinary. It cannot be , atleast in 2009.Some sectors may do well. so select stock can move up. amrket may be in the range of 14000-16000 this year. If 2010 budget is very good, it can touch 18000-20000.


Dr. K. Sreenivas

Jun 15, 2009

It seems the analysis is logical. But the nature and behavior of Individuals, Fund Managers will turn over night saying global cues. The market Movement cannot be predicted. But one can start invest for long term when there is a down side correction up to 12000 Sensex. Other wise stay away from the market.


anil kusumbe

Jun 14, 2009

nice vies


jitendra mehta

Jun 13, 2009

I feel if the money continously flow for next three months then 50% appreciation is definately possible


ramamohanrao g

Jun 13, 2009

A very balanced, analytical and cogently presented article.If one has learnt from experience has one should not rush again but make use of data presented in your research reports while making further investments.Looking at the track record of the present govt and their allies one should not have any wild expectations of economic recovery. It will take quite some time before the policies are implemented by the bureaucracyranked least in Asia.

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