Saturday, October 16, 2010

Sensex 20,000 + levels

Do not look at 20,000 Sensex level as a peak, which was attained more than two years ago. This is only a level in the journey of the Sensex.

In the Short Term, the Sensex level will depend upon the following:
1. Events in India and globally.
2. Liquidity flowing into the market
(a)Foreign Institutional investors are continuing to invest in the equity
market. Net FII investment during the last three months were
i. Rs. 24978.5 crores in September 2010
ii. Rs. 11587.5 crores in August 2010
iii. Rs. 16617.4 crores in July 2010

(b)As the risk free returns in countries around the world are low, there are
opportunities of returns higher than the proportionate risk they are
taking, and hence the flows into our markets.
(c)If global recovery is stalled, Governments are already talking about
Quantitative Easing 2, which will result in further liquidity.
(d)As long as the dollar continues to remain weak, flows will continue into
India, as there are additional returns from the weakening dollar.
3. Sentiment
(a) There is no euphoria in the markets. Retail investors continue to be
skeptical. Equity mutual funds saw the largest outflows ever in September
at Rs. 72,000 crores.
(b) The last stage of the bubble is normally a surge in small and mid cap
stocks. The BSE Mid Cap Index is 19.9% below its peak and the BSE Small
Cap Index is 26.7% below its peak.

In the long run, the Sensex movement will depend on Corporate earnings. The Indian markets have traded around 15 to 16 times one year forward earnings. Today we are trading at about 18 times one year forward earnings. So let’s remember the fact that we are trading above our historical averages of the last 15 to 20 years. However, we are still lower than the peaks of 25 times in 2000 and 23 times in January, 2008. With the growth in corporate profits, and subsequent re-rating, this PE ratio should come down.

Hence going forward, the corporate earnings have to be watched very, very closely to ensure that they are not faltering. The positives in the market are:
1. We are domestic consumption driven economy with a young population
2. National Rural Employment Scheme, which results money in the hands of the rural population
3. Oil Sector deregulation
4. GST Reform
5. Direct Tax Code.
6. Fiscal situation improving with higher than expected 3G auction, and regular disinvestment.

1. Re-balance you portfolio, to maintain the equity: debt ratio you are comfortable with. Studies have shown that 94% of your returns come from maintaining a disciplined asset allocation
2. If you are mainly in equity, then do book out profits regularly. Do not allow greed to swamp your emotions. If the market then subsequently falls, you can then add to equity again.
3. Fresh investments too have to be in the ratio your asset allocation.

1. Look for the long term, minimum of 3 – 5 years.
2. Invest through a Systematic Investment Plan or Systematic Transfer Plan.
3. Invest in proportion to your asset allocation, although if you are looking at a long term of more than 5 years, can take a larger exposure to equity.

There is no other investment opportunity that gives you the possibility of 15% + tax free returns, and hence there is no option but to invest into the equity market. However do understand the risks involved on the short term, and plan for the long term.

However, never try and time the market. This can have disastrous results on your returns For example:

1. Since April 2000, the Sensex has given an absolute return of 276%.
2. If you had missed the 10 best days, the return would be 216%
3. If you had missed the 20 best days, the return would be 159%
4. If you had missed the 30 best days, the return would be 110%

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost by the corrections themselves.”
Peter Lynch – legendary fund manager