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Morgan Stanley & GS forecast lower World GDP ahead

Thursday, August 18, 2011 Comments


For the first time today, I am beginning to feel a little concerned about the stock market crash of the past 1 month. I am generally an eternal optimist about equities. In my previous post, I hinted about how attractive, valuations have become in the Indian stock markets and how this could be a great investing opportunity for folks at large. My view was that a lot of the stock market carnage of the past month was due to negative sentiments triggered off by the S&P downgrade of the US. It was my belief that we could fast be approaching a stock market bottom around the 4,700 NIFTY levels as the effect of the negative sentiments would not last too long. Given that Greece was bailed out, the latest US job numbers along with the latest Indian IIP numbers, all suggested that the global economic fundamentals are intact. Infact, I was also a critic of the double dip theory.

However, today 2 leading global names that I respect came up with revised global GDP numbers. This has rattled me a little. Morgan Stanley has cut its global GDP forecast to 3.9% in 2011 and 3.8% in 2012, down from 4.2% and 4.5%, respectively.  What is important to note here is that the original forecast was 4.2% in 2011 and it was further increasing to 4.5% in 2012(which meant next year would be better than this year). However, now the GDP number has not only been cut in 2011, the trend(GDP growth rate) is likely to further worsen in 2012(which means next year is likely to be even worse!!). Furthermore, even Goldman Sachs has cut its global GDP forecast for 2011 to 4.0% from 4.1%.

Stock markets – sentiments and near-term strategy

Friday, August 12, 2011 Comments



Stocks markets, they say, are driven by 2 emotions – Greed and Fear. However, as Warren Buffett puts it, there is no comparison between the two. ‘Fear is instant, pervasive and intense. Greed is slower. Fear hits!’

If we try to analyze past bull runs and bear downturns, there are several observations that can be made. Though these observations tell a tale, the usual disclosure that ‘there are no absolute truths about stock markets’ continues to apply here.  Today I wanted to reflect on some observations I have made about stock markets over the years and how I am viewing the global stock market carnage of the last few days.

One of the things I have always seen about stock markets is that they always tend to overdo it. While a stock price over time tends to hover around the intrinsic value of the stock, more often than not, it swings like a pendulum around it due to a mix of macroeconomic and sentimental factors. So, if there is a bad news, panic sets in and the markets tend to free fall much below intrinsic value before sanity sets in and they come back. The same holds on the positive side too. Another important aspect is that the global economic climate influences the market mood and often hampers proper market decision making. So, if the going is good and markets are doing well globally, any bad news often just gets ignored. The same bad news creates havoc if markets are in a downswing. It is as if when the going is bad, markets almost hunt for bad news to justify where they are and react even more negatively when the news sets in.

US default and its implications

Sunday, July 31, 2011 Comments


There has been a lot of news about the US debt ceiling and the economic chaos that has been prevailing in the world’s most powerful nation. Would you believe it? They are on the brink of a default. Come August 2nd , the US government may not have funds in its coffers to meet its spending obligations. Today my wife asked me a rather innocent but valid question – “If they don’t have money to pay their bills, why don’t they just print some dollars and pay using those dollars?”

Well, I thought that I should pen down some thoughts on this critical issue which is threatening to pull the American economy back into recession.  To begin with, let’s understand some basic concepts that govern the issue at hand. First of all, its important to understand that printing of money in any country is controlled by that country’s Central Bank. Eg. It’s the RBI in India and the Fed in the US. The Central bank has a critical role to play. If they print a lot of money or leave interest rates very low, that would drive up liquidity leading to high inflation. If they do the reverse, inflation might be low but there won’t be enough capital to do business in the country, hence the GDP will go down leading to poorer lifestyles of the masses. Hence, these Central banks have an important role to play as they decide liquidity flow in the country. They act independently and are supposedly run by very competent economists.

The government of a country is like a large organization that spends money for the upliftment of   its people. This money comes either through taxes or by raising debt by issuing bonds. Government spending is very important as it leads to large scale creation of jobs for the masses and also helps people attain better lifestyles. Sometimes, a situation arises when the government runs out of money and in order to meet its spending obligations needs to either raise taxes (which is a politically suicidal move) or raise money through debt. As long as the debt remains within certain limits, borrowing can be a good idea. However, if the debt reaches dangerously high limits, raising more funds through debt can only create a fiscal deficit time bomb waiting to explode.

Impact of Interest Rates on the Stock Market

Tuesday, July 26, 2011 Comments


There was carnage in the market today. The BSE Sensex fell by over 350 points. In many ways, what happened today was a lot like what has been happening on the day of Infosys results in the past few quarters. The culprit for all the action was the 50 basis point hike in repo rate and reverse-repo rate by the RBI. A rate hike per se was already expected. Infact, a survey of market investors and experts conducted over past 2 days showed that over 80% expected a rate hike. Then why did the market fall so violently.

First of all, we must understand the significance of rate hikes on the market.  Interest rates determine the amount of liquidity flow in a country. The lower the interest rate, the easier it is to borrow. When it is easier to borrow, the supply of money in the market increases which tends to drive up prices, leading to higher inflation. Hence, though reduction of interest rates helps business, it negatively affects inflation. Inflation is a huge enemy for any country. As inflation rises, common people are impacted and it also endangers the value of currency. There have been several instances of hyperinflation suffered by many countries in the last century which have created huge systemic damage. Hence, it is critical to keep inflation in check.

How to Build a balanced investment portfolio?

Friday, July 22, 2011 Comments

Among the many things I haven’t really cared too much about, until recently, is the importance of building a good investment portfolio. Indeed, for many of us, investment management and planning tends to be a one-time exercise done in the Jan-Feb time period when we need to show evidence of investments made for the year to our company’s Finance department. Of course, we all realize that this kind of ad-hoc approach is far from ideal. But not many of us really care because we do not realize the impact of our financial misdemeanors in the short run. However, when extrapolated over a long run, this lack of financial planning can definitely make a significant difference to our savings. If I were to tell you that the accumulated loss due to improper financial planning over a 2 decade period could potentially finance a few package trips to your dream global destinations, a dream car and a few down payments for your dream house, then would it make you sit up? It must, because the impact can be surprisingly substantial! So, the best thing to do is to not waste a single moment and get down to the drawing board to build your investment portfolio.

Leveraging the power of compounding

Wednesday, July 20, 2011 Comments

The Power of Compounding
Albert Einstein called it the greatest mathematical discovery of all time. Benjamin Franklin supposedly said it was the eighth wonder of the world. That is the Power of Compounding! How does the power of compounding apply to the stock market?

When people invest in stock markets, there is often an expectation of huge returns. It is human tendency to see the top gaining stocks of the day/week and to see some of these stocks gain 30-40% in just a week’s time.  While the possibility does exist to bag such kind of returns in the stock market, it is really rare to bag such returns on a regular basis. I was just trying to do a simple analysis to see what kind of annual returns would stand us in good stead over a substantial time frame.

Let’s consider a time frame of 20 years. What if I were to tell you that there is a way by which you could multiply your wealth by 40 times in this 20 year period? To be more clear, what I am saying is, if you invest 1 lakh rupees today, you would get back 40 lakh rupees after 20 years. Would you be interested in a proposition like this? Well, if I had an option like this, I would have happily accepted it. How many people we know can actually multiply their capital by 40 times over 20 years? Not many. Well, what might surprise you more, is that this can be achieved by just generating a consistent annual return of 20% every year through this period. Yes, I am not talking about anything spectacular like the ‘40% in 1 week’ type of returns. I am talking about obtaining 20% over a 52 week period, consistently. That is all that is needed to multiply your principal invested by 40 times in 20 years. 

Relevance of Warren Buffett’s principles today

Tuesday, July 19, 2011 4 Comments

There have been several biographies and books written on the most successful stock market investor of the last half century. One would imagine that being such a successful investor, Warren Buffett(WB) must be following some unique proprietary theories, some complex empirical formulae, jazzy predictive tools and what not! Strangely enough, there is nothing jazzy or complex about WB’s principles. Infact, it’s all about doing the basics right, something which is the dire need in the markets of these times.

Before we get into the WB’s principles, we must first understand the stock market context we are in. In the year 2003, the BSE index was at 3,000. The next 5 years were the magical era in Indian markets. The BSE index rose 7 times in these 5 years to hit around 21,000. In these years, pretty much anything one touched in the markets turned into Gold.  This was also the era of an accelerated rise of the Indian middle class and penetration of the internet among the masses. Hundreds of thousands of online demat accounts were created and there was increased participation by the masses in the stock markets. Most of the people started trading in markets for the first time during these years. Unfortunately, what many people still haven’t realized is that this period was more of an aberration. Markets usually DO NOT rise 7 times in 5 years, especially markets like India that have already had the kind of run that we have had. This abnormal period unfortunately over-pampered and even spoilt large sections of investors who got used to expecting 30-40 % annual returns in the market year after year. It is like how Infosys started as a small cap stock and its share price rose by 100% year after year. It then became a mid-cap and then a large-cap stock and now, growing at 100% year on year is not just improbable but pretty much impossible. There is nothing wrong with Infosys, infact it is a much better and more established company today.  But market returns will now be more ‘normal’ than ‘irrational’. We must realize that the Indian stock market too, is now entering a similar phase.

GILT funds for attractive and safe returns

Saturday, July 16, 2011 Comments

In my previous post, I spoke about the need to safeguard your principal when you invest in stock markets, especially in the current testing times. I have been doing some research on what could be the best investment options in today’s market with a 12-18 month investment horizon. While examining the options, I adopted a ‘Safety First’ policy, which means my priority was to explore where I can park my money and get a decent and ‘almost’ guaranteed return. During this hunt, I came across an asset class which is relatively less spoken about but which looks to me to be a great investment option for entry in the next month or two given today’s market realities. I am talking about ‘GILT funds’.

Now what are these GILT funds? Simply put, gilt funds are mutual funds that predominantly invest in government securities (G-Secs). Unlike conventional debt funds that invest in debt instruments across the board, gilt funds target just a given category of debt instruments i.e. G-Secs. The latter are securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India. In years when stock markets perform well, everybody laps up stocks and nobody cares too much for debt funds. Debt funds tend to be liabilities in such times since they give much lower returns than equities. But in times of uncertainty and high prevailing interest rates, GILT funds start becoming performance heroes. I shall now explain why.

Investing in a Range-Bound Stock Market

Friday, July 15, 2011 Comments

These are tough times for any stock market investor. The market seems to be moving around aimlessly. It is very difficult these days to take any directional calls. The NIFTY is moving around in a broad range of 5,200 to 5,800 and toughest part is no one seems to be able to say with conviction whether it will break the lower end or the upper end of this band. There are some ‘bears’ who are beginning to raise alarm bells about the European sovereign debt crisis and the potential American double dip. If that were to happen, we could head back towards 4,000 levels on the NIFTY which could be a correction of 25-30%. Then there are the bulls who say that the markets have been listless and flat for way too long now. With the Diwali season approaching and also potential QE3 in the US, money would start to flow back into the Stock markets and they could start heading up.  It is these times that test the most seasoned of investors.  

Today, I wanted to dwell upon what I think should be our approach in such range-bound markets. I have mentioned in one of my earlier posts that timing a stock market entry or exit is the toughest decision to make in a market. Stock markets become relatively easy to navigate during bull runs or bear runs. In bull runs, people start buying all sorts of stocks. Stocks that have never been traded before and other penny stocks also become active and what’s more, people even start to make money on these stocks. Similarly in secular bear runs, one can make money by going short in futures or buying Put Options.

Impact of Greece and PIIGS on the Indian Stock Market

Wednesday, July 13, 2011 Comments


European PIIGS 

For the last few months, we have been hearing that Stock Markets across the globe are being held back by some problems in the Greece economy. As an investor in Indian stock markets one might ask, "How on earth does a problem in a smallish country somewhere in Europe affect us in India? We seem to be doing alright. Why should our stock market even react to this issue?"

Well, whether we like it or not, we are indeed impacted through a logical economic sequence which is what I intend to dwell upon today. First of all, we need to understand the concept of ‘Sovereign Debt’. When a government is in need of funds to finance its spend, it often borrows money from its public by issuing bonds to them. These bonds are called ‘Government Bonds’ and the government returns this money with interest over a stipulated time period. In the same way, governments often issue bonds in international currency to borrow from other countries. These bonds are called ‘Sovereign Bonds’ and this sovereign debt too needs to be repaid by the government. As long as the GDP of a country is healthy, the government is able to repay its sovereign debt. But sometimes this debt builds on a country and brings it to the brink of sovereign default.

Greece is in a miserable situation as its sovereign debt is 150% of its GDP. There is no doubt that it is going to default at some stage. Last year, the European Union and IMF came to its rescue by offering a bailout package to temporarily plug the crisis. Apart from Greece, other weaker nations in the Euro Zone – Portugal, Ireland, Italy and Spain have also been showing sovereign defaulting tendencies. These 5 nations(commonly known as PIIGS) along with the US and Japan to a lesser extent are all facing immense sovereign debt pressures.