Investors may look for global cues

Investors in India are likely to turn back to global markets for guidance in this truncated trading week in the absence of any major local near-term triggers. With the stock largely indifferent to positive events last week, including a rebound in the US economy and better-than-expected September quarter earnings of some top Indian companies, market participants suspect that a sharp fall may be in store in the near future.

“Even though Indian equities will now take cues from global markets, RBI’s policy move remains a drag on the market,” said Gopal Agrawal, equities-head, Mirae Asset Global.

Last week, RBI laid the ground for higher interest rates next year. Investors fear about the impact of rise in interest rates on consumer borrowing and on investment plans of companies, which are still recovering on lower expenses, rather than pick-up in business.

Over the past two weeks, India’s benchmark indices have corrected 8-9%, amid sharp swings, driven by foreign institutional selling worth Rs 4,450 crore in the period. What has been a key worry for investors worldwide is the inability of the markets to hold on to rebounds, of late. Many of them were forced to buy emerging market stocks, including India’s, despite being bearish, on fears of being left out in the rally.

“After global equities rose 70% in six months (and emerging equities 106%), many fund managers who had bought into equities against their better instincts were itching to find an excuse to take profits,” said Garry Evans, global head of equity strategy, HSBC Bank. “A few weaker data points in the US, the first stirrings of central bank
tightening and the end of the third quarter earnings season were enough to give them that,” he said in a report.
Even though the US economy reported a growth in the third quarter, investors remain sceptical about this recovery, as unemployment in the world’s largest economy and importer are yet to recede.

Back home, shares of telecom companies, including Bharti Airtel and Reliance Communications, may remain under pressure on fears the ongoing price wars would dent profitability. Credit Suisse, in a telecom sector report, said despite the sharp share price correction in these stocks in recent weeks, the ‘risk-reward remains unfavourable’.

“Negative news flow, weak earnings and consensus downgrades could continue for the next 6-12 months,” said Credit Suisse. “Stocks need to fall 15-20% below our target prices (30-40% downside from current levels) before we turn buyers,” it added.

Investors should be cautious of small caps

While the slowdown in the economy hasn’t been as much as expected, smaller-sized firms have been affected more than their larger peers. For this reason alone, small-cap stocks should actually be underperforming...

The Bombay Stock Exchange’s (BSE) Small-Cap Index has risen by 160% from its lows on 9 March. The BSE Mid-Cap Index isn’t far behind, with returns of 144% during the same period. That’s far more than the 105% rise in the BSE Sensex and the 110% rise in the BSE-100 Index.

One would have imagined that investors would be wary about investing in the less liquid mid- and small-cap stocks after last year’s harrowing experience. The mid- and small-cap indices had corrected by 75% and 80%, respectively, from peak to trough, while large-cap indices had corrected around 60%. But with markets across the world doing well and sentiment reviving, the past seems to have been forgotten. What’s more, while the slowdown in the economy hasn’t been as much as expected, smaller-sized firms have been affected more than their larger peers. For this reason alone, small-cap stocks should actually be underperforming.

The fact that the reverse is happening perhaps points to exuberance among so

The fact that the reverse is happening perhaps points to exuberance among some domestic market participants, and it may be time for investors to be cautious about small-cap stocks and perhaps even the markets in general.

At current levels, the BSE Mid-Cap trades at a 16.6% discount to the BSE-100 and the BSE Small-Cap trades at a 23.5% discount. Back in January 2008, when the markets had peaked, the two indices traded at a discount of 6% and 22%, respectively. While mid-cap valuations are better off in comparison, those of small-caps are getting into a dangerous zone last seen during the January 2008 peak.

While there certainly may be small- and mid-cap firms that still offer value, investors need to be beware both of penny stocks and entering into the market at such high valuations.

Investors put in Rs 1.23 lakh cr in July

Mutual fund investors put in more than Rs 1.23 lakh crore into various schemes in July - the second biggest infusion in a month this fiscal - mainly in fixed income plans.

The Association of Mutual Funds of India (AMFI) in a monthly report said at the end of July, investors had put in funds worth Rs 1,23,679 crore (Rs 1.23 trillion). The maximum of infusion of funds was in fixed income plans.

This is the second biggest inflow in the fiscal 2009-10 after the Rs 1,54,192 crore (Rs 1.54 trillion) investment in April.

The MF industry had witnessed outflows worth Rs 83,937 crore in June, after two consecutive months of inflows, which analysts believe was mainly on the back of a heavy pull-out by banks.

At the end of July, fixed income plans with assured annual returns, saw a maximum investment of Rs 95,764 crore (Rs 957.64 billion), followed by liquid or money market funds which have a higher liquidity and a short maturity period, that saw inflows worth Rs 24,698 crore (Rs 246.98 billion).

Besides, equity funds investing in stocks attracted investments worth Rs 4,232 crore (Rs 42.32 billion).

"The banks can better anticipate the interest rate scenario in the country and accordingly they change their investment strategy," Taurus Mutual Fund Managing Director R K Gupta said.

Indian investors remain most optimistic in Asia: ING

Indian investors continue to be the most optimistic lot in Asia and as much as 84 per cent of those surveyed expect the stock market to rise in the third quarter of 2009, according to global financial services group ING.

As per the Quarterly Investor Dashboard Sentiment survey by ING, investors in the surveyed Asian countries believed that economic situation has improved and 93 per cent Indians feel conditions would further improve in the third quarter.

"The Indian investor index jumped to a record high of 182 for second quarter of 2009 from 133 from first quarter of 2009 amidst anticipated strong GDP growth and stock market improvements," the ING report stated.

In the first quarter of this year as well, investor index had jumped 75 per cent to 133 from 76 in Q4 2008. Overall, there was a significant 81 per cent upswing in the investor sentiment in Asia for the first half of 2009 and a 55 per cent quarter-on-quarter increase for Q2 2009 from Q1 2009, the survey said.

Investors in India have emerged optimistic in almost all the key performance indicators including household financial situation, impact of US economy, property prices and stock marker recovery.

"84 per cent of the Indian investors feel that the stock market will further rise in Q3 2009, reflecting bullishness and reinforcing the optimistic outlook for the next quarter," the report said.

It's time for retail investors to enter the market

Even as the bloodbath played out on the Street late last year, there were two events that investors, the Street, companies and the global business community - in fact, just about everyone who's been tracking the big India story - was waiting for. The formation of the new government and subsequently the Budget.

And while the election results did not disappoint - and fired up the Sensex by about 50%, the impact of the big defining event - the Budget - has been exactly the opposite. Not only did the Sensex fall by 9.5% in only five days, the smooth upward movement witnessed post the June 16 election results, saw a complete reversal. The signals obviously are mixed and confusing and investors are not sure about the way forward with their portfolios. Reason why we at SundayET decided to try and decode the signs for you with our signature event - The SundayET CEO Roundtable on Personal Finance. We have always tried to keep our reader - the investor - on the cutting edge of financial planning. And this time it was no different.

Our experts, drawn from banking, insurance, asset management, securities and tax planning, included S K Goel, chairman & MD, UCO Bank, Krishnamurthy Vijayan, executive chairman, JP Morgan Asset Management India, D K Aggarwal, MD, SMC Wealth and Rajesh Sud, CEO & MD, Max New York Life Insurance. Moderating the discussion was Amitabh Singh, tax partner, Ernst & Young India.

The main takeaway was simple, how should you - the investor - adapt your portfolio according to the market sentiment. What unfolded through the discussions were guidelines on wealth creation, wealth management and now, even more important, wealth resurrection. The question was how to preserve what you already have and keep it moving till the market comes back.The gurus put their heads together in trying to map out the road ahead. And here's their verdict - you, the investor, are good to go. Retail investors, who want to bet their bucks on the Indian equity market post-Budget, should no longer wait for that big-ticket event, instead it's time to enter the market, but for the long haul. And here's what they all agreed on - the right asset allocation is critical for a successful investor who maximises profits and stays on top during any market tumble. Exactly timing the market is tough even for the savviest of investors. So it's next best to go contrary and buy now when others are still shying away from the equity market.


Some of the points that came up during the discussion included the issue of rebalancing portfolios, the sectors to stay tuned into, better tax planning and the insurance vs mutual fund debate. Here all panellists advised retail investors to approach professionals as the equity market still remained tough to crack. We have not missed the bus yet. There are many stocks which are still cheap. If the market goes down from here on, buy more,” Mr Aggarwal from SMC Wealth added.And even for risk-averse investors who like to stay away from volatile equity markets, there were a few takeaways.Mr Goel of UCO Bank predicted at least a 200-basis point fall of the fixed deposit rates in the near future, which means that those who still go for fixed deposits in banks could look forward to higher returns than those who postpone their investment decisions.Mr Sud of Max New York Life felt that conservatism was still useful and while leveraging was a great strategy, but over-leveraging was not.On the tax front, Mr Singh of E&Y, felt that those in service needed to be more savvy to get more bang out of their bucks.For JP Morgan’s Mr Vijayan, there are positives on both the domestic consumption and the infrastructure growth fronts. “I feel there’s no need for mutual fund investors to dramatically change their asset allocation. With the hope that government expenditure will trigger growth, the equity strategy of investors is likely to go in the same direction,” he said.

Overall, pin-stripe suits and optimism blended well together and that’s surely music to the ears of Indian investors.

Money management

Srikumar Bondyopadhyay tells investors how to rejig assets for higher returns Small investors have been the biggest losers in the recent market mayhem. Experts say small investors follow a herd mentality, which means they buy in hordes when stock prices are high, but when the markets come crashing, they either get stuck or sell investments at a loss.

Profit is the ultimate goal of any investment planning. If an investment does not yield the desired result, book profits may turn into book losses when the markets plunge.

So, what should small investors do to beat the market blues?

Asset watch

First, as an investor, you need to set an investment goal for yourself and chalk out an asset allocation strategy that will help you achieve this target. You should regularly review the relative balance of your asset allocations. If there is any imbalance in excess of 10 per cent in a particular asset category, use this as a trigger to sell part of your investment in that asset class that has seen an appreciation to restore the balance.

It will also help you correct the timing of your entry into and exit from the markets.

Let us explain this with the help of an exercise (see chart). The table tells you how much money you need to invest now to help you become a crorepati after a given period of time.

It is clear from the chart that longer the period of your investment, lesser will be the capital required to be invested.

The illustration, however, considers only a one-time investment and no interim contributions after the initial endowment. So, if you have the required initial capital and are willing to make additional investments on a regular basis, you can become a crorepati quicker.

It also can be seen from the table that higher the rate of return, the lower is the initial capital requirement.

Risk-return nexus

However, it is the “rate of return” on the investment that throws up a tricky situation as different asset classes have different risk-return profile.

For example, you can get an 8 per cent rate of return for the next 5-10 years by stashing away your money in bank fixed deposits or any one (or a combination) of the state-run small savings schemes, such as NSC, PPF, Post Office Monthly Income Scheme. For such schemes, there is no fear of any capital loss.

You can spice up your returns a bit more by including debt mutual funds in your portfolio without significantly increasing the risk factor.

However, if you are looking at more than 10 per cent rate of return over the long term, you’ll have to invest at least part of your capital in equities, either directly through stock exchanges or through equity mutual funds.

Though equities generate higher return, they carry risk. So, you need to be judicious about asset allocation.

The rule book

There is a thumb rule for asset allocation. According to the rule, an investor’s equity allocation (as a percentage of total investment) should be equivalent to 100 minus the age of the individual. If you are 40-years-old, you should allocate 60 (= 100 - 40) per cent of your total in investment in equities or equity-linked instruments. The remaining 40 per cent should be invested in fixed income or debt instruments.

But if you are 60-years-old, you would rather need a steady flow of income from your investments. Hence, your equity exposure at the age of 60 should be much less (at 40 per cent) than when you were 40-years-old.

Hence, this asset allocation strategy follows the formula of lowering one’s investment risk with the growing age of the investor.

Market mood

Now, let us see how you can brave the market highs and lows using this strategy. Let us

consider a 40-year-old investor who has an initial capital of Rs 1 lakh. According to the asset allocation strategy, the investor will invest Rs 60,000 in equities and equity-linked instruments and Rs 40,000 in fixed income schemes and debt instruments.

Suppose, the fixed income plan fetches an annual rate of interest of 8 per cent. If equity prices go up 50 per cent in the next six months, the value of equity investment will be Rs 90,000 and the value of his fixed income investment will be Rs 41,600 at the end of the period.

A review of the investment portfolio after six months will reveal the following:

• The total investment has gone up to Rs 1,31,600, a gain of 31.6 per cent.
• Value of equity investment at Rs 90,000 constitutes 68.39 per cent of the total investment.
• Value of fixed income at Rs 41,600 comprises 31.61 per cent of total investment.

Here, we seen that an imbalance has cropped up following a 50 per cent rise in equity prices. The investor should restore the balance by bringing down the equity component of the portfolio to 60 per cent from 68.39 per cent and reinvesting the proceeds in fixed income instruments.

This means the investor should sell equities worth Rs 11,040 and reinvest the amount in fixed income instruments. Thus, after the rebalancing act, the revised portfolio will be:

• Total investment: Rs 1,31,600
• Equity investment: Rs 78,960, or 60 per cent of the total portfolio.
• Fixed income investment: Rs 52,640, or 40 per cent of total investment.

Now, if stock prices fall by 50 per cent in the next six months, the value of the equity portfolio will be Rs 39,480 and that of the fixed income investment will be Rs 54,745.60.

Total investment at the end of 12 months will, thus, stand at Rs 94,225.60. Equity and fixed-income assets comprise 41.9 per cent and 58.1 per cent, respectively, of the investment portfolio. This is again an instance of imbalance that can be restored by switching fixed income investments worth Rs 17,055 to equities.

After rebalancing, your equity investment will be Rs 56,535 (39,480 + 17,055).

If you had not gone for the rebalancing, then your initial equity investment of Rs 60000 would have come down to Rs 45,000 at the end of one year.

Thus, by adopting this asset allocation strategy, one can significantly reduce the investment loss if there is a steep decline in equity prices.

This was so because the investor was able to book profits from his equity investment when the market was up. On an overall portfolio basis, the loss is only Rs 5,774.40.

Retail investors must pre-empt FII inflow & act accordingly

Talk about the Indian equity market and the discussion invariably shifts to foreign institutional investors (FIIs). And their mention is not

without merit. Over the years, FIIs have become a big force on Dalal Street and had a big role to play in the 5-year long bull-run that ended in January 2008. Their importance was even more pronounced in the ensuing bear-run as they led the sell-off on the street.

Their influence can be gauged from the fact that the value of FII holdings in the BSE-500 companies is equivalent to 12% of the combined market capitalisation of the index and they are one of the biggest non-promoter groups on the Street. The FII holdings in key large counters are even higher. For instance, the average FII holdings in Nifty 50 companies are nearly 15% of the total paid-up capital. All the above figures are based on the company’s shareholding pattern as on March 31, 2009.

Given their purchasing power, it’s but natural for FIIs to play a key role in the market movements. The adjoining charts show relative movement in FII investments in equities (on cumulative

basis) and NSE Nifty Index for the last ten years. As is evident, the Nifty closely follows the trajectory of FII inflows into the country. The correlation has actually become more pronounced from 2003, which coincides with the beginning of the big bull-run .

As readers will notice during the bull-run , every big move in FII investment

(either positive or negative) was followed by a similar change in the Nifty. This aspect becomes clearer in the second adjoining chart, where we have plotted the monthly percentage change in Nifty against similar changes in the cumulative FII investment into the country. This foreign connection was in full force during the recent volatility in the benchmark indices.

In the past two weeks, the benchmark Nifty lost nearly 10%. This was blamed on the dwindling dollar inflows into Indian equity markets. In the last eight trading sessions, FIIs have been net sellers to the tune of over half a billion dollars. This sent shivers through the bones of bulls, many of whom fear that this may be a precursor to a big FII sell-off on the street. Given the recent FII activity, the fear is not without merit. The Friday rally would have, however, soothed many a nerves on the street.

The readers would thus be better served tracking the FII money inflows into the market rather than chasing dozens of other “leading” indicators. However, this is easier said than done. As the adjoining charts show, the FII investments are as volatile as the stock market itself. For instance, in the last 76 months, while average FIIs inflows have been to the order of $ 636 million, the monthly flows have ranged from a high of nearly $5700 million worth of inflows to outflows of $3100 million.

While such wild fluctuations make future estimates a tough exercise, we can make some sense out of the long-term trend in FII inflows intoIndia. First, barring the blip in 2008, FIIs have always ended the year in a green zone. This has meant that Indian equity markets have always been bullish in the long term.

So if we average out the short-term fluctuations, long-term investors can expect a positive return from Indian equities. For instance, even during the lowest point in 2008, the Nifty was up nearly double its value from the peak of dotcom boom. Secondly, the FII investments

never follow a one-way trajectory.

Every big purchase is followed by equally big sell-offs . There’s never a dull moment for an FII watcher. As the adjoining chart shows, dollar inflows take a roller-coaster ride and few months of positive inflows are followed by months when they are net sellers. The lesson for the retail investors is clear.

Never try to chase or mirror dollar inflows on the street, but rather pre-empt them and act accordingly. To put it simply, start accumulating when FIIs are relatively inactive (i.e market is looking dull) and begin booking profits just as the FII investment cycle is peaking (or the market is making new highs). For instance, in the latest rally, the FII investment peaked in early June and that was the time for retail investors to start booking profits.

If the past is any guide, every 4-5 months of positive FIIs inflows is followed by 2-3 months of negative inflows. And the wave length is getting shorter and the frequency is rising. For instance , between 2004 and 2004, the FIIs were net buyers for 19 consecutive months; next year the green patch never lasted more than 6 months and from middle of 2007, the buy and sell cycle alternated every 2-3 months.

The current buy-cycle is now 3 months old and FIIs may hit the sell button anytime now. Since early March, most large cap stocks have doubled while many mid-cap and small-cap counters have tripled. This is the kind of buoyancy that FIIs will love to book profits on.

The same rule applies to those of you who were smart enough to invest during the down cycle. It is time to book some profits so that when the FIIs press the sell button, you have ready cash to take advantage of the opportunity. As the saying goes, don’t try to catch the peak/bottom, ride the trend.

Anchor investor

Make no mistake, an anchor investor, who is all set to be unleashed by SEBI into the dormant primary market to rev it up, is not an angel investor. An angel investor is a benevolent person with deep pockets and capacity to play the role of a venture capitalist. He bankrolls an unlisted company.

The anchor investor, on the other hand, is a bridge between the company and the public in the run up to an Initial Public Offer (IPO). He would be a prize catch for a company making an IPO. He would be flaunted by the company before the public whose confidence he is supposed to boost. He may be likened to a company’s brand ambassador not in the market for its product or services but in the primary market.

King amongst the QIBs

What the market regulator SEBI has done is to bring about improvements upon the extant book building process and its edifice — Qualified Institutional Buyers (QIBs). As it is, QIBs participate in the price discovery process called book-building but are not pinned down to fulfil their commitment, as all that they have to pay upfront is 10 per cent of what they have bid for the shares.

In the event, the company can pin them down only to the extent they have put into its coffers. From the contours of SEBI’s scheme of things, it appears that after having participated in the book-building process, the company may summon them for a final round of bidding, this time round to pin one or more of them for a more committed role of being the anchor. As it is, the quota reserved for QIBs is 50 per cent of the IPO size. An anchor investor can be allotted not more than 30 per cent of the shares reserved for QIBs, which implies that out of the overall quota of 50 per cent, the anchor’s quota cannot exceed 15 per cent.

But unlike other QIBs who have contributed only 10 per cent as margin money, an anchor has to cough up 25 per cent and follow it up with the remaining 75 per cent within two days of the closure of the public issue. His appointment as the leader of the QIBs then is a noblesse oblige, a position or honour that entails responsibility.

Why not pin down all participants?

Carving out a king from amongst QIBs raises a fundamental issue: Why did SEBI not pin down all the participants in the book-building exercise. If irrevocable commitments were obtained from all the QIBs, the company would have something more substantial to flaunt before the public — endorsement to half of the size of its public issue as against only of 15 per cent by the anchor.

That SEBI had to resort to anointment of an anchor from amongst QIBs is a tacit admission of its failure to discipline the tribe of institutional investors. What it has done is to give up doing the impossible and instead achieve what is possible — discipline the one willing to stick his neck out on 15 per cent of the issue size instead of trying to discipline everyone although their combined strength may give greater credibility to the upcoming IPO.

It however remains to be seen whether the public would be willing to bite the smaller and less substantial bait — it might if the anchor is a reputed financial institution.

The moot questions

The first moot question is whether the anchor-investor can really be pinned down. What happens if he refuses to pay the balance 75 per cent after the public issue is over? Wouldn’t it have been better to collect the full amount from him upfront? Is SEBI allowing too much latitude to the anchor, the same mistake it did with reference to QIBs?

The anchor, after all, can change his mind and refuse to cough up the remaining 75 per cent. In that eventuality, would the initial 25 per cent paid by him be forfeited or it would be used to allot the requisite number of shares which of course would be just 25 per cent of his total commitment?

SEBI’s hunt for a confidence builder in the primary market is the culmination of the process set in motion by Section 64 of the Companies Act, 1956 — appointment of an issue house. A company has the liberty of using a conduit for making public issues in terms of Section 64.

The issue house has all the trappings of an anchor except that while the anchor entices public to subscribe to the public issue, the issue house unloads the shares — it had subscribed earlier — when the times are more propitious.

The issue house then could end up with a tidy profit. In other words, under the issue house arrangement, what the public pays goes into the coffers of the issue house, but under the anchor regime, what the public pays would go into the company’s coffers. Which perhaps explains why there have been few takers for the issue house dispensation.

Best Indian Stocks – Defensive Investors

Last week, I posted a list of stocks for the investors who tend to follow Aggressive approach and have also mentioned about other risk profiles. In this article, I will list some of the good stocks for Defensive Investors.

Who are Defensive Investors?

Conventional definition defines defensive investor as the one who does not take undue risk to make money. But in stock market, no one is spared of risk and defensive investment therefore does not mean not taking risk at all. It just means taking affordable risks by following a conservative approach in stock selection to derive optimal returns. In many cases, defensive investors match the returns of aggressive investors and they do not lag behind significantly. They also invest in some growth stocks but their primary investment strategy revolves around “Conservative” stocks.

Branding stocks as growth stocks or conservative stocks heavily depends on perception. In fact some stocks might have given more than average returns but still would be branded as a defensive bet just because investors perceive it that way. Hence, considering all this I have come up with a list of stocks that can be considered by investors who follow conservative approach.

Banking / Finance

HDFC
State Bank of India
Bank of Baroda
Bank of India
Punjab National Bank
Federal Bank

Pharmaceuticals

Sun Pharmaceuticals
IPCA Labs
Dr Reddys Laboratories
Pfizer
Cipla
Cadila Healthcare
JB Chemicals and Pharmaceuticals / Piramal Healthcare

Software / Services

Tata Consultancy Services
Infosys Technologies
Educomp Solutions

Shipping / Offshore

Great Eastern Shipping
Shipping Corporation of India Limited
Great Offshore


FMCG

ITC Limited
Hindustan Unilever Limited
United Spirits
Asian Paints
Marico Limited
Colgate Palmolive
Britannia Industries Limited / Nestle India
Titan Industries

Power

NTPC
PTC
Power Grid Corporation
Tata Power Company
CESC Limited
Rural Electrification Corporation
Neyveli Lignite Corporation


Agriculture / Fertilizer / Chemicals

Monsanto India Limited
Bayer Crop science Limited
BASF India Limited
Gujarat State Fertilizer Corporation
Coromandal Fertilizers
Tata Chemicals

Diversified / Cement

Grasim Industries
Kesoram Industries Limited
Nava Bharath Ventures
Ambuja Cements
ACC Limited


Engineering / Electronics / Telecom

BHEL
ABB Limited
BEML
Bharath Electronics
Bharath Forge
Hawkins Cookers Limited
Blue Star
Crompton Greaves
Century Textiles and Industries
Siemens

Bharti Airtel

Tata Communications

Oil / Gas / Steel

Reliance Industries Limited
ONGC
Indian Oil Corporation
HPCL
BPCL
GAIL

Tata Steel
Indian Hume Pipe Company

Others

Dredging Corporation
Container Corporation
Bilcare
Blue Dart
Bannari Amman Sugars
Shree Renuka Sugars
MRF
Mahindra & Mahindra
Asian Hotels
Power Finance Corporation

I request the readers to share their list of stocks in the comments section.

Kumaran Seenivasan

www.stockanalysisonline.com

Large investors hold bulk of MF assets

Large investors have a share of 78.73 per cent in the assets of mutual funds. Retail investors account for the remaining 21.27 per cent.

Corporate houses, banks, financial institutions, foreign institutional investors and high net worth individuals (HNIs), investing around Rs 5 lakh or more, are the large investors.

According to the Association of Mutual Funds in India (Amfi), of the Rs 4,18,764.80 crore managed by the industry at the end of March, assets worth Rs 3,29,694.56 crore belonged to institutional investors and HNIs, while the retail investors’ share was Rs 89,070.24 crore.

However, the number of folios of retail investors was 4,63,94,283, which is 97.5 per cent of the total accounts.

In other words, large investors and HNIs were the biggest beneficiaries of the tax advantages in mutual funds.

Under the current provisions of the Income Tax Act, mutual funds have certain tax advantages over other instruments.

For example, dividend income from mutual funds is tax-free. If it is an equity scheme, the fund house doesn’t have to pay a dividend distribution tax; if it’s a debt scheme, the fund house will have to pay a dividend distribution tax of 14.45 per cent for individual investors and 22.66 per cent for corporate investors. For liquid and money market funds, the dividend distribution tax is 28.33 per cent.

The long-term capital gains tax for a period of more than 12 months is nil for equity schemes. For debt schemes, the tax is 10.3 per cent without cost indexation and 20.6 per cent with cost indexation.

Thus, for an institutional investor, or an HNI paying income tax at the rate of 30 per cent or more, mutual funds are always a better option. Till 2007-08, corporate houses and other institutional investors preferred to park their money that they might need in 10-15 days in money market schemes instead of current accounts of banks. In doing so, they earned 7-9 per cent annual return.

In 2007-08, the government increased the dividend distribution tax in liquid/money market schemes to 28.33 per cent from 22.44 per cent. This reduced the scope of tax arbitrage for institutional investors. Mutual funds then came up with “liquid plus” schemes that were positioned between liquid/money market funds (ultra short-term) and short-term debt funds.

The dividend distribution tax on liquid plus funds was 14.45 per cent for individual investors and 22.66 per cent for corporate investors. These schemes caught the fancy of the investors, along with exchange-traded funds.

After the crisis in money market funds and fixed maturity plans in October, institutional investors had slashed their portfolios. But with the liquidity condition improving, their interest has revived.

Investors lose crores in bid to get rich quick

At a time when companies are finding it hard to raise capital to fund their projects due to the global slowdown, thugs in India have successfully steered clear of the recessionary spiral. Beating global meltdown fears, they have cashed in on the ignorance of gullible investors, duping them of crores of rupees.

And with two such cases coming to light recently, an alarmed Delhi Police is planning to launch an advertising campaign urging people to be cautious against alleged fraudsters like Subhash Aggarwal and Ashok Jadeja. The latest case involves owners of BK Jewellers Rajesh and Chetan Mallik who are being alleged to have duped more than 300 invetsors of crores by assuring them handsome returns on investment.

Similarly, Aggarwal, who has been arrested, allegedly lured people into investing Rs 10,000, promising them Rs 1,000 interest every month. In the same manner, self-claimed godman Ashok Jadeja in Gujarat also won the trust of a denotified tribe over a period of time and assured its members of tripling their investment. In all the cases, the alleged fraudsters won the confidence of the people they targeted through word-of-mouth publicity and by initially living up to their promise. While Jadeja allegedly duped people of Rs 1700 crore across 11 states, Subhash, who started three years ago, allegedly made away with several thousand crores, operating from his Aman Vihar residence. Both of them targeted people from the low-income group.

Cautioning investors, joint commissioner of police (crime and railways) Amulya Patnaik said: "If by any means or advertisement, e-mails, any person is offering returns which look very attractive, we appeal to investors to consider such offers with caution and verify the details about the company. We will issue a list of dos and don'ts through a series of advertisements.''

Explaining Jadeja's modus operandi, a senior officer of the Economic Offences Wing (EOW) said: "Jadeja targeted his own tribe. He invoked religious sentiments to milk his tribesmen who have traditionally been into the liquor trade. The tribe is very secretive and Jadeja knew that no one from outside the community will come to know of his designs.''

He was also aware that his tribesmen were financially illiterate and would never invest in mutual funds or any other financial instrument. "And that was the reason he had a free run for almost six months since January. His publicity was done through word of mouth and his tribesmen approached him from all corners of the country. His aunt, Manbai, advised Jadeja to inject a religious aspect into the scheme. She spread the word that Sikotar Mata had blessed Jadeja to help his community grow wealthy,'' said the officer.

Aggarwal, on the other hand, used the old trick of quick and fat returns. To win the trust of investors, he initially did keep his word. "Later he collected huge sums of money from investors and gave them cheques. But these cheques bounced and Aggarwal after two to three assurances disappeared.''

Investigators say that such complaints are very common. These people will always target a community or a region and would set up their base secretly. "Any person, coming out with unrealistically attractive schemes, knows his exit time and what it takes to create a base. In Jadeja's case, Ahmedabad Police has found that he started the money chain schemes in January. His scheme was more like multi-level marketing in which investors also become agents and spread the word,'' said another police officer.

Such scams are not new. "Delhi Police recently registered cases against Kanakdhara MLM Company for allegedly defrauding investors by drawing them into multi-level marketing. They promised a return of Rs 26 lakh on an investment of Rs 13,000,'' said an EOW officer.

Kanakdhara was started two years ago from west Delhi. Soon, the accused set up their offices in Mumbai and other parts of India and allegedly duped investors of Rs 10 crore. The Mumbai Police arrested the father-son duo of Bhupendra Singh Bakshi (54) and Gurkaran Singh Bakshi (24) in February this year. The police claimed the duo amassed wealth worth several crores, including several acres of land in Rajasthan. The Delhi Police also seized SUVs during the initial days.

Investigators cite many problems in probing such cases. "It becomes very difficult to trail the siphoned off money as there are no receipts. We have been taking help of forensic auditing in Kanakdhara case to determine the amount of losses,'' said a senior police officer. Another problem is that it's very difficult to link these men to any property.

In India, Investors 'Buy Anything'

India's reinvigorated stock market is sparking a rush by companies and the government to raise cash.

So far this year, issues of new shares have been scarce. But with the Bombay Stock Exchange's benchmark index at a 10-month high, many companies have plans to raise capital to bolster balance sheets and fund growth, bankers say.

The new government's budget, scheduled for release in early July, also could usher in new sales of stakes in public companies. The frenzy may be welcome news to investors looking to ride a rapid rise in India's stock market over the past few months.

Since India's election result May 16, which yielded a surprisingly strong victory for the ruling Congress party and its allies, the BSE's Sensitive Index, or Sensex, is up 27%. On Wednesday it closed at 15466.81, up 2.3%, and is up 60% year to date.

From its lowest point on March 9, the market has surged nearly 90% on signs of revival in the Indian economy, hopes that the new government will do more to drive growth, and a general rise in stocks around the world. India's gross domestic product increased 5.8% in the three months to March 31.

But the anticipated rush of new issuance also raises the risk that too many new shares could flood the market and quickly soak up demand.

"Can the market get saturated or, indeed, deals downsized? There is a distinct possibility," said Tarun Kataria, head of global banking and markets for HSBC in India. "Given current euphoria, investors are keen to play India and, it would appear, will buy anything. At some point soon, there will be a flight to quality."

Data provider Thomson Reuters expects $50 billion of new shares to be issued in India this year. So far, there has been just $1 billion.

Many of the new corporate share issuances are expected to be qualified institutional placements, in which only certain investors -- including foreign investors registered with the Securities and Exchange Board of India, and Indian banks and mutual funds -- can participate. Initial public offerings also are likely, bankers say, from both government-owned and private-sector businesses.

"Most of the balance sheets have been starved of equity over the last one year, so everybody's seeing this as an excellent opportunity to go and raise some," said Dilip Kadambi of ABN Amro Global Banking & Markets in India.

Shareholders of real-estate company Sobha Developers Ltd. will vote June 17 on whether to approve a $318 million fund raising. The company is looking to raise the money through a qualified institutional placement, company secretary N. Venkatramani said.

Infrastructure company Hindustan Construction Co. will ask shareholders on June 22 for the right to also raise $318 million. The form the fund raising will take hasn't been decided.

Real estate company Parsvnath Developers Ltd. hopes to raise $529 million over the next 12 months and will put the plan to shareholders on June 20.

On the IPO front, state-owned hydro-power outfit NHPC Ltd. and oil-exploration company Oil India Ltd. are expected to issue shares. On Monday, Rahul Khullar, the outgoing top bureaucrat in the department in charge of state company disinvestment, said the government is likely to sell stakes in NHPC and Oil India by September, followed by six to seven other companies before March 31, 2010.

The government's budget could offer further divestment plans amid the need to stimulate the economy without severely worsening the fiscal deficit.

Air India, India's national airline, and state-run telecommunications company Bharat Sanchar Nigam Ltd., or BSNL, are likely to sell some shares, market watchers say.

—Vibhuti Agarwal and Mukesh Jagota contributed to this article.

Write to Jackie Range at jackie.range@wsj.com

How to be a great investor

Director of Enam, Mahesh Chokhani brings the benefit of his expertise over long years of trading in the market. So in his time, he has seen it all -- the mood swings of the market. He gives away a few of his secrets, so that a lay investor can benefit.

He told CNBC-TV18 that India has emerged from a 20-year bear phase and is in the middle of a large secular cycle but there is scope for growth here as well. But in the immediate future, there was a real chance of the market witnessing a correction. Excerpts from an interview given to CNBC-TV18:

What do you need to become a good investor?

The starting point to being a good investor is really being a person who understands himself very well. So are you really self aware and being an investor is really no different from being a businessman.

And, if for instance, your personality is cut out to be someone who needs a monthly salary cheque for example, it's very unlikely you are going to have patience or the wherewithal or the self confidence to be sitting on an investment for a long period of time, waiting for that cheque to come in two years later.

Similarly, if you're just conditioned to getting an interest cheque in your bank account every month, it's very different from being an entrepreneur, who has gone and invested, taken the pain for the next 3-4 years and then he is starting to get a pay back on his project.

Is a personality trait important for shaping a style of investing?

I think you need to take a call because investment is a lonely art at the end of the day. It's not about winning a popularity contest.

It's not about doing what the crowd is doing because the biggest fortunes in the world have not been created, by people who did what the herd was doing. So a classic investor in that sense is a different breed of fish.

And even if you see the most successful fund managers in India or the West, they are not necessarily people with the best social skills for example, they are not very comfortable hanging out in a crowd or in a party or so on and so forth.

The psyche is slightly different and one shouldn't try to trivialize it by saying everyone can be an investor and it's very easy and so on. You should be mentally ready, if you are going to come and be in this business.

Can you discipline yourself to be a good investor?

I find it extremely fascinating that there are a number of Indians who led in the investment field, not just in India but across the world, when at the end of the day, this is the land of spirituality.

The heart of the Indian tradition is this whole feeling of equanimity and detachment and doing your duty well and the markets are actually the biggest training ground for someone who wants to become a much better human being because here, you are going to be tested all the time with greed and fear.

You are going to feel pompous at times, you are going to feel completely self humiliated and destroyed at times and if you can maintain that set of calm and equanimity in these kinds of completely extreme conditions, that's just going to make you a better person.

I think if that's the core of an Indian or any other good person, if you can build that skill set within yourself, it actually is the biggest starting block for being a good investor.

How do you not get carried away?

The best investor you meet, they don't think about the money they make. They just think of it as something that they were attempting and they got it right. So for most people, it isn't about the money, it's about the thrill of the chase. It's about getting it right. It's about doing something, where you felt you were against the rest of the world or general opinion and I think that's really the kick. You must love this process.

You must love the process of finding someone who is going to create wealth, not just for you but for the whole nation or for another set of investors. If you don't enjoy that process, you are not going to be able to invest. And at the end of the day, I don't think it's really about the money.

Has the parameter of awareness changed now that you need to be far more aware at a global level than you could have got away with maybe 25-25 years back?

Well, the basics don't change because investment at the end of the day is about an outlay today, for what you will get in the future.

Certainly, if one thinks that India was a closed economy 20-years ago and therefore you didn't need to know what is happening in the rest of the world, to an extent it is true. But if you weren't aware even then of what was happening, you won't have, for example, have foreseen the collapse of the Indian rupee, you won't have foreseen what the fiscal deficit can do to you in the Indian context.

And if you look at the operating assumption in the 1990, it is really what you call the era of import substitution because you had a picture that this is a backdrop, under which all our businesses are going to operate and if you see the giants which were created in that era, it was Reliance and Sterlite and Jindals and Videocon, were really creations of that era.

But is the world more complex or is it just an assumption?

It is, because the reality is that this wasn't such a noble and well liked profession 20 years ago and there were few people. Now whatever needs to get analyzed, there is so much data overload that unless you have operating mental models in your head, against which can you test your hypothesis all the time, you are going to be completely swamped with the amount of information.

Which end of the cycle do you find us in right now? We have gone through the euphoria over the last couple of years, where are we now today?

I think we are within a larger secular uptrend. This market had a base of 100 in 1980, until 1988-89 we were pretty much at 800, so we were up 8-times in that decade and it was consistent with the interest rates of that decade.

So you must have a sense of what's going on and that's where we are in this cycle. We have effectively completed a 20-year bear cycle and I think, we are in the middle of a very large cycle. Having said that, you can have a large secular cycle and you can still have an economic cycle within that. So interest rates may have already bottomed out in the beginning of this year and you will see some correction going ahead.

Market hits Rs 50-trillion mark; attracts one lakh new investors

The ongoing surge in the stock market has pushed the shareholders' wealth past Rs 50,00,000 crore mark -- in the process bringing in A total of about 1.2 lakh new stock market investors opened their demat accounts, which is necessary to trade in equities, during the month of May, according to data available with the two depositories, National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL).

This has increased the total number of demat accounts in the country to over 1.5 crore.

The market experts believe that the inflow of a large number of new investors into the market could be attributed the sharp surge in the recent months as well as expectations for revival of the IPO market with some fundamentally-sound public issues by the government-run companies.

The total investor wealth, measured in terms of cumulative market capitalisation of all the listed companies, has soared to about Rs 51,00,000 crore. This represents a gain of about Rs 23,00,000 crore from the level seen in later October last year, although it is still about Rs 20,00,000 crore below the peak seen in January 2008.

With the benchmark Sensex hitting its record high of 21,206.77 points on January 10, 2008, the total investor wealth had risen to a high of about Rs 72,00,000 crore at that time. However, a sharp meltdown thereafter pulled the Sensex to below 8,000-mark in late October 2008.

Since then, the Sensex has nearly doubled and has regained 15,000-point mark. Out of the total gain of about 7,500 points in the benchmark Sensex since its 52-week low of 7,697.39 points on October 27, 2008, nearly half the gain has materialised in the past one month alone.

Coinciding with the rally in the stock market, which in turn was partly fuelled by the new government promising speedier economic reform process and also disinvestment in some PSUs through IPOs, the total number of demat accounts in the country swelled by over one lakh over the last month.

"The recovery of the secondary markets would have encouraged many investors who were waiting on the sidelines during 2008 market fall. Also, the upcoming IPOs can also be another reason," SMC Capitals equity head Jagannadham Thunuguntla said.

Expressing similar views, Bonanza Portfolio's assistant vice president (equity research), Avinash Gupta said that the recent rally in the market and election results have improved the sentiment of the investors.

As per the CDSL figures, the total demat accounts increased to 56.19 lakh at the end of May from 55.64 at the end of April.

Similarly with NSDL, such accounts increased to 97.64 lakh at the end of the last month from 97.15 lakh at the end of April.

During the month, the Sensex climbed more than 28 percent in its strongest monthly performance in about 17 years.

An oath for the amnesiac investor

Published in The Hindu - Sunday Magazine on May 31, 2009

With the stock-market surge having erased all memories of the recent crash, the best prescription for amnesiac investors is an oath to not make the ‘same’ mistakes this time.

It’s hardly been a few months since the market hit rock bottom, when papa bear - Shankar Sharma cooed on CNBC that he would not be surprised if the Sensex plunged to 5000. But now that the UPA is back – Voila! Our economy is going to instantly recover with the tap of a magic wand. Just that instead of a fairy godmother, we are counting on ‘politicians’ this time.

The market crash of 2008 has already faded into a distant haze and so have the lessons learnt (if at all there were any). Chartists are rife with predictions about Sensex hitting 18000 this year and our own Shankar Sharma now says he would not be surprised if the market rises by 40% in the near term.

If you ask me what the economy or the sensex will do this year – the answer would be ‘I don’t have a clue’. What I do know are 1) Economies don’t improve overnight; they grow over the long term but in cycles 2) Over time, a wise investor can clock-in at least twice the annual returns from Bank FD by investing in stocks, provided he doesn’t forget the ‘cardinal’ rules.

Here is an oath for over-exuberant investors who have already forgotten the pain caused by mistakes of the past:

I will reduce my exposure to equities when the numbers point to a bubble
It is dangerous to remain fully invested in an expensive market. One can easily verify how expensive the market is by checking the P/E (price to earnings ratio) of the Index at: http://www.nseindia.com/content/indices/ind_pepbyield.htm

History has shown that whenever the P/E of the Index rises over 22, we are in for trouble. So resist buying at such levels and try to reduce your overall holding in equities to be on the safe side.

I will not be seduced by trends
It’s tempting for our brains to observe a high growth rate and then simply extrapolate this trend into the future, like what we did with real estate stocks. This has proved to be fatal, time and again. A fine example is the stock price of Infosys in year 2000, when it was trading at a price equivalent to 350 times the annual earnings per share, with high hopes that the company will continue to grow its earnings at nearly 100% p.a. But we all know what happened, earnings did grow but not as high as expectations and today this excellent company is available at pretty much the same price as it was 9 years back.

I will not salivate over companies making mega-acquisitions

Acquisitions take many years to work and many of them fail. Buying a stock just because the company has made an acquisition is foolish. While synergies are easy to quantify on paper, realizing them is an entirely different ball game. What one must stay away from are companies acquiring firms larger than themselves, by paying ‘cash’ and that too borrowed from the bank! That’s a potential triple whammy.

I will depend on ‘margin of safety’ to protect myself

The case for investment in a stock is based on the future performance of the company. But as we have seen it’s hard to predict future performance. So the ways to hedge your bet are: A) never invest 100% of your cash reserve in stocks B) buy stocks at minimum 30% discount to the conservatively estimated intrinsic value.

I will not borrow to invest in stocks or invest in companies that have too much borrowing

Investors and promoters who borrowed too much are either forced to liquidate their assets at dirt-cheap prices or stuck with loans worth much more than the value of underlying investments. Don’t borrow money to buy stocks and avoid investing in highly indebted companies (companies with > 25% debt/ total capital).

I will not take advice from salesmen

Most people hesitate to pay for independent financial advice and as a result settle for advice from brokers (or other agents) without realizing that there is an inherent conflict of interest because brokers earn a commission based on how much one invests, irrespective of the performance of one’s investment.

I will not speculate in IPOs

Companies offer shares for sale in the public-market only when people are willing to pay extraordinary prices. That is why you witness maximum IPO activity during bull market frenzy and not in bear markets. There are many opportunities to buy stocks cheap; the IPO is not one among them.

I will not use astrology to decide where to invest my money

Hundreds of academic studies demonstrate that no technical strategy can over the long term beat the simple technique of buying and holding on to an Index Fund. Yet, people are hypnotized looking at charts.

I will not blindly follow FIIs

During the hay days of 2007, private placement of shares by a company to FIIs would immediately take its share price to stratospheric levels. Today, many of the same stocks are available for a fraction of the price. Surely FII investment could be a vote of confidence for owning a stock, but not a reason to own it at any price.

I will learn some fundamentals before investing

All of us work hard to earn our pay. But when it comes to investing the money we have earned, we choose not to spend even a fraction of the time. If you think your money is valuable, it is your moral responsibility to acquire at least the basic knowledge required for making and monitoring investments.

Indian investors most optimistic in Asia: ING

ING’s quarterly Investor Dashboard Sentiment survey shows a significant increase of 75% in Indian investor’s sentiment in the first 3 months of 2009 as compared to the Q4 last year.

Indian investors have emerged as the most optimistic lot in Asia and along with their Chinese counterparts have driven an increase in the region’s overall investor sentiment in the first quarter of this year, a latest survey says.

The quarterly Investor Dashboard Sentiment survey by global financial services group ING shows a significant increase of 75% in investor sentiment in India in the first three months of 2009 as compared to the fourth quarter last year.

“Despite a slowdown in global economies and volatility in international financial markets, the ING Investor Dashboard Sentiment Index for India reflects the highest level of investor optimism across Asia,” the survey stated.

The India investor index has jumped 75% to 133 in Q1 this year from 76 in fourth quarter of 2008.

The survey indicated that Indian investors were confident about the economy, backed by assurances from the business community and the government.

“Compared with its neighbours in Asia, India’s growth of recent years has been driven predominantly by domestic consumption as well as domestic investment. This pattern and growth insulates economy from set backs felt in both global & regional economies,” ING Investment Management India acting CEO Navin Suri said.

Investors’ wealth swells by nearly Rs18 lakh cr in two months

The Bombay Stock Exchange benchmark Sensex has gained 4,916.75 points or 51% since March and settled at 14,625.25 at the end of trade on Friday.

Investors, who have burnt their fingers in the stock market mayhem last financial year, have something to rejoice now as their wealth has swelled by over Rs17.78 lakh crore in just two months of the current fiscal.

The total investors’ wealth, measured in terms of combined market capitalisation of all the listed companies, has increased by over Rs17,78,969.74 crore in the last two months to Rs48,65,044.91 crore at the end of May.

Total valuation of all the listed companies stood at Rs30,86,075.17 crore on 31 March 2009.

“Everything is looking good both in domestic and global front. It seems that for investors happy days are here again,” SMC global vice-president Rajesh Jain said.

The Bombay Stock Exchange benchmark Sensex has gained 4,916.75 points or 51% since March and settled at 14,625.25 at the end of trade on Friday.

The 30-Sensex companies, which account for over 47% of the total market capitalisation of all the companies, saw their combined valuation rise by Rs7,15,686 crore in two months.

Combined market cap of the 30-blue chip stocks rose to Rs22,23,427.46 crore at the end of Friday’s trade, from Rs15,07,741.84 crore at the end of March.

The stock market rally has added Rs24,54,789 crore since October when the Sensex had plunged below 8,000-level. Total market cap stood at Rs24,10,256 crore on 27 October, when the index had dropped to a 52-week low of 7,697 points.

Time to be fearful, not greedy

So, does this dramatic rise mean you should stuff your portfolio with metals and real estate stocks? Not really. Experts give technical and fundamental reasons for investors to avoid these sectors.

It's an old joke by now: How do you make a small fortune on the stock market in 10 days? Just start out with a big fortune. It's black humour at its best, since everyone's losing money these days. Or are they? Those who bought shares of JSW Steel at the beginning of March 2009 would have doubled their money in a little over a month. From Rs 163 on 9 March 2009, the stock had risen 102% to Rs 330 by 16 April. You'd have made a pretty profit from Tata Steel as well; the stock rose 76% from Rs 152 to Rs 269 per share. Unitech and DLF rose by 74% and 69%, respectively, over the same period. The bigger picture shows the BSE Metals Index gained 55% in less than six weeks, the Realty Index rose by 61%, while the BSE Sensex rose by 34%.

That's good news, right? Especially when you consider that these stocks were possibly the worst performers of 2008. So, does this dramatic rise mean you should stuff your portfolio with metals and real estate stocks? Not really. Experts give technical and fundamental reasons for investors to avoid these sectors. We take a look at the reasons for the recent rally in these sectors and why it might not be a good idea to buy now.

Still Rusty
As we have seen, the metals sector seems to have rebounded from abysmal lows. But here's the reality: the big 70-100% gains are calculated on a low base. The fall in metal and realty in 2008 was so steep that these stocks entered the oversold territory and were due for a relief rally. Before the beginning of the current rally (9 March), the BSE Metals and Realty indices were deep in the red, with losses of 77% and 90%, respectively, from their January 2008 highs. So the present gains made by these indices are on the lower base, which makes percentages look bigger than the actual gains in stock prices.

Consider this. The 74% rise registered by Unitech helped it gain only Rs 18.55 per share to Rs 43.35. This is because the stock rose from its low of Rs 24.80 on 9 March 2009. The lower base effect is clearly visible if we compare the current numbers with the indices during the January 2008 highs. Even after adding the recent gains, both the BSE Metals and Realty indices were 65% and 83% lower than their respective January 2008 highs. In real terms, what the current rally has done is to help the indices hint at a recovery.

Individual stocks also performed well because of low valuations. "Markets adjusted to the overt negative reaction (in 2008) to these sectors. Some of the metals were beaten down to 10-year historical lows. Globally, commodities are at record lows. The view is that there is a greater possibility of an improvement in prices than a downside from now on. Therefore, metal stocks too performed well. It has more to do with cheap valuations," says Sonam Udasi, vice-president, consumer research head, BRICS Securities. The shares of metals companies rebounded amid hopes that commodity prices had bottomed out.

With the price of base metals rising for the first time in 2009, investors hoped that the industry might have seen the worst of the price correction. "Base metal prices have rallied because of the continued buying by the Chinese government, production cuts and short covering. This has helped in improving the earnings outlook for non-ferrous companies like Sterlite, Hindalco and Nalco. Steel stocks too moved up due to an improved demand in the domestic market and the end of the price correction in international markets," says Sanjay Jain, senior vice-president, research, Motilal Oswal Financial Services.

Property Woes
The March rally seemed like light at the end of the tunnel for the real estate industry. It had faced a very bad year, beset as it was with problems, including price correction, lower consumer interest, tight liquidity and rising interest rates. However, it appears that things have indeed started looking up. With banks cutting housing loan rates and RBI pumping more liquidity into the banking system, most of these real-estate companies have been able to pull through the worst of tight liquidity conditions. This has helped the real estate companies to restructure their loans and raise fresh funds. "Realty companies were beaten down the most in the downfall. As the interest rates are likely to fall, these companies will outperform the Sensex," says Ajay Parmar, head of research, Emkay Global Financial Services.

These days, when we think of the real estate sector, we generally consider only the property development companies. But the recent rally saw cement companies in the limelight. The positive momentum in cement stocks is largely attributed to an unexpectedly strong growth in dispatches. According to Angel Research, cement dispatches have grown by 8-10% in the past five consecutive months as against the 4.5% growth in October 2008. "Our channel check with dealers and several industry experts suggests that the strong demand for cement in the past couple of months has been on account of the heavy infrastructure activities due to pre-poll spending by the government and the strong demand by rural housing," said Pawan Burde, analyst at Angel Broking, in a recent report on the cement industry.

Many cement manufacturers were either going slow or were delaying setting up additional capacities due to the weak demand. This helped cement producers raise their prices. During January-March 2009, cement manufacturers raised cement prices by Rs 8-10 per bag. The price hike was witnessed more in the western and central regions of the country.

Investor Behaviour
Experts have suggested that the recent rally was also helped by the rise in investors' risk appetite. "The increased risk appetite has compelled the investors to look at aggressive sectors rather than only at defensive ones. That's why we saw underperformance in FMCG stocks," says Parmar. With most of the defensives (FMCG and pharma) peaking at 15-20 times price-to-earning (PE) multiples, investors were forced to look beyond the conventional defensives.

Realty and metal stocks are available at cheap valuations metal stocks are quoting at 0.6 times their book values and real estate stocks are trading at a steep discount to their net asset values. This, combined with improving liquidity conditions, saw more and more investors entering these sectors looking for good bargains.

The large-scale exit from defensives led to the relative underperformance of the BSE FMCG and Healthcare indices, which are historically known as reliable bets in bear market conditions. Between 9 March (the beginning of the recent rally) and 16 April, the BSE FMCG Index gained only 16% and the Healthcare Index rose by 20%, while the Sensex gained 34%.

"These sectors had been outperforming when the broad markets were down on account of higher risk perception. Now, with a positive change in risk perception among investors, the markets have rallied and the outperformance of these sectors is being reversed. Also, on a relative basis, these sectors had been quoting at premium valuation to the market and, hence, turned expensive," says Krishna Sanghvi, vice-presidentequity, Kotak Mutual Fund.

Should You Buy?
Though positive signs are emerging, experts are not too comfortable recommending a full-blown exposure to these stocks. "Yes, investors can look at these sectors with a two-three year perspective. But they also have to be ready to take the rough with the smooth. It can be volatile in the interim. It is time to look beyond defensive stocks simply because the risk-reward is favourable for investors with over a two-three-year time frame," says Udasi.

The major worry regarding these sectors is that none of them are completely out of the downturn or are showing any definitive signs of recovery. The recent rally is based on a couple of factors, which indicate tentative signs of recovery, like bottoming out of metal prices, rising dispatches of cement and falling home loan rates. The main factor to look for is the consistent rise in private/consumer demand for these sectors. The recent pick-up in metals and cement prices is largely attributed to the stimulus spending by governments across the world, not due to the consistent rise in demand from the consumer sector.

Analysts expect cement prices to peak soon and decline from the second quarter of 2009-10 because of supply catching up and demand slackening ahead of the monsoon season. "Though we do not expect metal prices to fall below the recent lows, there is an overhang of excess capacity. We expect a consistent pick-up in private demand only by 2011," says Burde.

However, there is one factor that's going in favour of these sectors low valuation. From this perspective, analysts are comfortable buying steel and cement stocks with an investment horizon of two-three years. "I believe metals and cement would do well in the next two-three years. However, the market has moved up quite sharply. Wait for some correction as your timing and entry point will always provide you a margin of safety," says Parmar.

As we have said often enough, timing the market is best left to the professionals. If you must have some exposure to either metals or real estate, you might be better off with the former. Despite cement and related sectors pulling up the industry, recovery in the property market seems remote. The demand for metals, like other commodities, is cyclical, and so you might make profits when the industry revives.

via IndiaInfoline