According to our finance minister Mr. P. Chidambaram “India will be affected to some extent, although indirectly. But Indian business and industry have placed India in a situation where we can weather the storm. Going forward, we can still end this year with growth of 8 percent. I am confident that in 2009-10 the growth will bounce back to 9%," India is more exposed to the ongoing financial-sector stress but it may be hurt less by the global recession that will follow the credit crisis.
SENSEX DOWN 58% WITHIN 10 MONTHS
INDIAN RUPEE DOWN 21% WITHIN 10 MONTHS
GOLD DOWN 17.5% WITHIN 15 DAYS
CRUDE OIL DOWN 57% WITHIN 3 MONTHS
Everything changed very fast!
Indian market:
Just a year back analyst was predicting SENSEX will reach 25000 in 2008. There was absolutely no fear. Investors became greedy to create more and more wealth in shortest time. SENSEX took 20 years to scale 10000. But it took just 480 days to move from 10000 to 20000 level. During reversal it crashed to 10000 within 194 days. Due to sudden turn of sentiments investors got slaughtered like sheep. Same analysts now predict SENSEX will test 7000 by end of the year.. F Investors are panic and fearful. They sell at throwaway price to stop the erosion of wealth and make heavy loss. The total investor’s wealth, measured in terms of market capitalization of all the listed companies together, dipped to Rs.35 trillion as against close to 73 trillion on January 10, 08 when the benchmark Sensex had scaled its life time high. l Indian market touched 21206 at P/E ratio of 28. On 27.10.2008 Indian market closed at 8506 at a P/E ratio of 10.36. (P/E ration means Price/Earnings ratio)
While finalizing this article Sensex breached 8000 level on 26th October 08.
Foreign inflows:
Just a year back government and regulators were trying to control the foreign inflow. Net FII inflow into India in year in the first 10 months of calendar year 2007 reached to USD 18.6 billion. Much of the FII inflows into India are into the stock market which has taken the stock market indicators to crazy levels which just created bubbles and illusions of wealth. Indian became proud to see some of our large capitalists briefly becoming the richest men in the world as the value of their personal share holdings shot up. Today we can see, even fundamentally strong stocks sinking into the bottomless pit due to the quick exit from these FII’s. FII’s are selling not because they have concern over Indian market fundamentals. They are now short of capital to cover their losses in US and they will take it out from where they can. Banks in the U.S. and Europe are hungry for money to fill holes in their balance sheets. It seems like FII’s are dictating terms of Indian market.
Net outflow in year 2008 for the first10 months is USD 13 billion. Now, suddenly regulators are lifting most of the barriers of foreign inflow. In October last year SEBI banned all fresh issue of P-Notes with derivatives as underlying to curtail the inflow. In October this year SEBI has reversed its stance on P Notes to arrest the outflow of money from the markets.
Indian rupee:
Just 10 months back government and central bank was putting all its efforts to stall the appreciation of rupee as Indian rupee was climbed to USD 39 in January 2008. Currently government works opposite to halt the rupee depreciation against the dollar. Rupee has plummeted 15% in the last six months alone, and over 22% since the beginning of 2008. The currency weakened past 50 per dollar for the first time on 24th October. Indian rupee is going to remain among the most vulnerable in Asia to risk aversion in the next six months because India is one of the two economies, along with Korea, which still has a lot of hot money that can leave anytime.
Inflation:
Just 3 months back controlling the inflation was the top on the agenda of our policy makers.. Higher fuel and food prices have pushed inflation 12.63% percent and forced the Reserve Bank of India to raise interest rates three times since June.. Inflation numbers have been on the downtrend since the past few weeks. Inflation for the week ended October 18 came in at 10.68%. Currently, global credit crunch has taken over the top spot of the agenda. Now government is worried about global recession and Indian slowdown and cutting the CRR to inject the liquidity into the system. Between October 6 and 20 RBI injected Rs. 1,85,000 crore liquidity into the system.
“Credibility is like toothpaste, easy to lose/squeeze out, but almost impossible to regain/put back in”
Crude oil
Just about 3 months back oil price reached to a record high of USD 147 a barrel.. On Oct 24th, Even OPEC decided to cut output, oil fell to USD 62 a barrel – down 57%, due to concerns on global economic slump hurting fuel demand.
Gold:
Gold price touched to Rs. 1400 per gram on October 10th but soon prices started sliding down to Rs. 1,155/- almost 20% down within 15 days.
Optimist looks at the opportunity
“View Mr. Market as having a disorder and being in a manic depressive state and take advantage of this state of disorder." Warren Buffett
Yes, present market condition is same as what great W. Buffet examined “manic depressive state”
Legendary investor John Templeton, who died recently, said the “best bargains are found at the point of "maximum pessimism." You don't get maximum pessimism during bull markets. You get them when the world looks like it's falling apart. Yes, it looks like things are falling apart. Every stock investor knows that you're supposed to buy low and sell high. Bull markets give you a chance to sell high. Bear markets give you a chance to buy low. Unfortunately, too many investors are lulled into complacency during bull markets and scared out of their wits in bear markets. So they do just the opposite, buying at high bubble valuation and selling very low.
Optimist investor sees light at the end of the tunnel. But pessimist looks at it as a light of incoming train!
For smart investor bear market is Gift from financial gods. This chart explains the gains a investor can make if he buys low and sells high.
UPS AND DOWN S IN STOCK MARKET IS NOT DIFFERENT
LEARN FROM THE HISTORY – SENSEX UPS AND DOWNS
Ups and downs in stock market is not different. Even if you are a solid long term investor likely to feel emotional right now. By knowing a bit of market history you can stifle your worst instincts. Every bear market in history is followed by a bull market.. Brief history of Indian market given in above chart will help you to understand this better. Price/Earning ratio indicates the valuation.
Stock market meltdown is like natural calamity. Investor has to be prepared for it. One cannot argue with the market. At present fearful violent market is crushing everything without bothering individual stocks fundamentals and merit. But at this point of time a smart investor looks beyond the havoc created by the crash and look to what can create value for long term. Investor should understand that Indian growth is mainly driven by domestic demand and consumption and hence Indian growth story in the medium to long term is strong, and certainly much more robust than the developed markets and also other emerging markets.
Indian Real GDP growth:
Once the current panic settles down we can see a reversal.
Foreign capital will start flowing in again.
Oil prices are declined and oil price is going to remain low.
RBI governor recently told that inflation is expected to come down to 7% by March 09.
When inflation comes down, expect moderate interest rates
Political climate should settle down after the elections.
What is the investment strategy at this point?
Warren Buffett famously said, "You don't have to do extraordinary things to get extraordinary results.
What are the ordinary things?
Invest for long term (don’t trade)
Have clear investment goals
Be systematic
Be disciplined
Current attractive market valuations provide a strong platform for reasonably long term returns.
Very attractive for NRI’S
Present foreign currency conversion rate is very attractive for NRI’s. This is the most attractive time to get twin benefits of taking benefits of conversion rate and also taking advantage of mouth watering valuation of Indian equities.
Stocks or mutual funds?
Investor should find out their comfort zone and make decisions if they like to go for individual stocks or basket of stocks through mutual funds. Mutual funds employ professional managers to oversee the operations. These professionals typically have many years of experience in the business of selecting and evaluating investments for the fund. They make the entire buy and sell decisions, relieving you of that responsibility. Determining a portfolio's asset allocation, researching individual stocks to find companies well positioned for growth as well as keeping an eye on the markets is all very time consuming. People devote entire careers to the stock market, and many still end up losing on their investments. By investing in mutual fund investor can avoid some of the complicated decision-making involved in investing in stocks.
However If you have sufficient knowledge and time to track and monitor a stock,. You can invest in today’s blue chip companies. You can also look into investing in future blue chip companies. However investor should note that during recent market meltdown biggest loser is the one who ho had demat account and who tracks his portfolio everyday. It is hard for him to control his emotions. . Just imagine a loss for an investor who brought a stock of particular company at 625 when the market is at its peak. He brought again at Rs,.500 to average his loss. Brought the shares again at 400 and once again at 300 he found the share is very attractive. He could not control his emotions. On October 24th the stock is trading at Rs. 45. Unfortunately investor does not have cash to buy again instead he is feared that this stock is going to touch 25 he decided to sell! This is a fact. I am sure most of demat account holders who are in same boat are experiencing similar stormy situation.
Greed gives rise to people taking undue risk. No regulator can control the greed and fear of investors. Investor cannot control stock price but they can control their emotions.
Lumpsum or SIP?
Many investors don’t want to look at the beauty of SIP investment. Please read my article to understand more on mutual fund investment and SIP
http://www.daijiworld.com/chan/exclusive_arch.asp?ex_id=899
At this point of time, if investor have surplus amount which you do not need for another 3 to 5 years, can invest lump sum amount in good diversified equity mutual funds. Even market rallies back from 8000 to 13000 levels it is almost 60% growth. However, currently it is impossible to gauge the impact of global financial crises at this moment..
Golden opportunity to accumulate units through SIP
Nobody can tell how long global recession is going to last. This is the golden opportunity to invest in great Indian companies and accumulate units at very cheaper valuations. I had given a example of Mr. Rock in my last article. ROCK is going to become “corepathi” soon. Once again I am giving the details as of April 2008
To understand how Mr. Rock became rich, please look at the Sensex yearly chart below:
Sensex yearly opening and closing from 1995
When Mr. Rock commenced his SIP., in Dec 1995, Sensex was at 3110 level. Sensex touched 5900 in Feb 2000. But for almost 7 years (Dec 95 to Jan 2003) Sensex was trading at 3300 levels. During these 7 years investor had accumulated almost 14000 units at an average price of Rs. 26.4. On Jan 2, 2003 value of each unit was Rs. 30.4. He would have disappointed at the 7 years returns had he checked his networth. in Jan 2003. He sticked to his long term goal of retirement planning and allowed his investment to grow.
But within next 5 year his networth increased by 1450%! Value of each unit when Sensex reached its peak in Jan 2008 was Rs. 471/- .Valuation as of Jan 10 2008, of these 14000 units accumulated during this slowdown phase was almost 65 lakhs! (14000 x 471)
As of 24th October value of each unit stood at Rs. 202. However as per our advise, In April 2008, Mr.Rock switched his funds from equity to debt when the value of each unit was 371 and protected his accumulated wealth from erosion.
It is important that while focusing on long term goals, investor should protect their accumulated wealth “cream of the cake” by switching to debt when the valuations becomes expensive and economic indicators signals red.
Conclusion:
“The markets are a voting machine over the short term but a weighing machine over the long term” these are the famous observations from Benjamin Graham, Warren Buffett’s mentor.
Over the long term, equity market as constantly delivered superior returns, throughout expansion, recession, inflation, and war. Don’t allow your long term plans to get crushed by the market sentiments. Our entire capital market system is predicated on the fact that the market balances risk and return effectively in the long term although this may not be the same in the short term. Hence think long term. Set long term financial goals. While giving attention to the market returns also equal focus on risk management. Investing in mutual fund Systematic Investment Plans (SIP) allows you to strike a right balance between risk and caution.. If you have SIP don’t stop it rather increase your SIP investment.. Accumulate more units while market is trading low..
Preparation, patience and discipline are important aspects of investment.. Sensex is trading at lowest ever valuation in the history Indian market. Grab the golden opportunity to achieve your financial goals.
However, before investing money invest your time.
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