What can Eurozone do?

The Europe situation remains worrisome. Why am I focusing on this issue? Because this will determine the long term trend of our markets. Europe can not mend itself. USA looks like an angel compared to the European crisis. Greece is a foregone conclusion and people are now contemplating minimal damage there (orderly default). Italy and Spain pose new issues. So what now? Austerity measures are not easy to implement...but are necessary...if only as a starting point. So will years of excesses be corrected in a hurry? I think not. Growth stimulus will not work. Europeans have to swallow the bitter pill that things will not change in a hurry and they are looking at at least two years of pain.

On to the US, things are better, so lets keep it at that. Back home? Flirting with all time lows. Now the time correction has worn people out. Like I mentioned in my previous posts, this cyclical rally may only frustrate people. Also a time of tremendous opportunity. Select companies with self sufficient business models which can do well in the long run are available at dirt cheap valuations. If one has the capacity to hold on for an extended time correction, this is a stock pickers paradise. Consumption themes, esp in organised retail and consumer durables still has not died. While I see no immediate trigger for structural plays like capital goods and construction, I do also understand my limitation to time these counters and have picked them some winners for the long term, assuming if and when the turnaround happens, I may not be able to get them at these values.

I would not pick up expensive defensives right now, its like not being a stock picker and just being safe. I would rather pick another asset class then. Alpha seeking could be done in Tata Motors, Pantaloon Retail, Lovable Lingerie, Exide Industries, Axis Bank, BoB etc.

The Pain Continues....

The pain continueth....as they say! 2011 has been a difficult year, with what everyone expected but did not really want to believe, that the world would collapse.

Lets face it, the developed world, like it or not, has collapsed. It is time for soul searching. What went wrong in Europe (PIGS) and USA? Living beyond means? Not having enough "real" assets to back paper stuff? We can dwell into the depths of what happened but it all boils down simply to this!

India in the past has grown despite the political and business setup and not because of it. The same may continue...even now our economy has the pizzazz to deliver 7.5% growth. I will take that anyday over sub 3% global growth....any friggin day! The consumption theme may fizzle out now, given the fact that there has been a concerted effort by the Reserve Bank of India to hike rates. Its bloody expensive to buy anything on credit now and the retail guy along with the SME will suffer most. This is delaying the capex cycle more than slowing consumption but eh...the transmission effect takes time. Also we have to factor in the rural economy which is largely cash based and the underground economy as well!

So what is in store for the markets? I am afraid six more months of sideways movement...some day gains here and there, probably an astute trader can make money during this time frame. But for us fundamental investors, time to shop, keep a 3 yr horizon, chances are that you will not regret buying during this phase!

Inception...Crossroads?

Nifty in a stubborn range. OK. Budget is done and over with. OK. No Damage. OK. I am getting fat...NOT OK! Seriously though, from the last time I wrote, things have hit a bit of status quo, markets trading in a tight range. Commodity prices continue to hover high thanks to high speculative interest, crude spikes off and on due to Mid East disturbances.
My condolences to the Japanese people. They are a brave and stoic lot. I am sure they will emerge stronger from this twin natural shocks. In fact, I think their economy may get a little booster in form of reconstruction etc which shall take place now.

What do we do with domestic markets? Though valuations have come off, there is still a fair amount of healthy scepticism across the board. Stock specific seems to be the theme of 2011. Auto sector continues to do well. Tata Motors needs a seperate post to do justice to their turnaround story of JLR. Bajaj continues to maintain its healthy margin and volume profile. Forget MUL and HH for now, M&M looks a decent rural play, so all in all this sector offers some more bite. Ditto for financials and IT.

When will our infra/ cap good guys play? Been a while since they performed, valuations are at an all time low. My sense is there is some more protracted pain, till our macro chinks in the armour are sorted. See, if you cant lend at a viable rate, projects may not take off. There is a liquidity angle to this for the interim. If capex does not kick off, I do not know how well are we going to sustain 9% GDP growth, so it is a vicious cycle. L&T and BHEL have to rock the moment we see a semblance of recovery. It is more of a time correction where these stocks are concerned. It would be an investors call when he would like to get in.

So, watch the cricket world cup for some time, nothing drastic is going to happen in the interim!

Aha!

Well, my last post was in November! I need to be a bit more pro active whilst bloggin eh? Well, since I last wrote, things have totally had a U turn. As I mentioned in my previous post nearly 4 months back, liquidity is to be handled with care. Notice how it has swept most people off their feet when it evaporates. And evaporate it has! But there is a reasoning behind most things. FIIs are the deal makers and breakers for a large part of our market, last years record inflow of $29bn was, as most people believed, difficult to follow up this year. So they are net sellers to the tune of $1.5bn as of date, due to better prospects back home and cheaper and more attractive emerging market options in Korea, Russia etc. Face it, with shoddy governance, sticky inflation, domestic liquidity tightening and unforgiving valuations, our market was ripe for a correction.

What now? There continues to be a lag in policy implementation, to put it mildly. Commodity pressures would continue which would mean lower OPM for most companies. Financing is not easy so capital charges would hit the bottom line. There do seem to be lack of positive triggers for the interim. However, valuations have cooled off to a large extent, the corporate earning structure remains intact. My view would be to ride out the storm by picking up some Warren Buffet style blue chips, one which are not heavily swayed by commodities or regulations and have the staying power for a bad cycle.

Cheers!

QE 2 and more

Quantitative Easing part II. Nothing beyond the obvious. FOMC has decided to pump in USD600bn over 8 months i.e. USD75bn per month.What Fed will do is basically purchase Treasury securities and in turn flood the market with money. This is to boost consumer sentiment, tide over unemployment, basically pick up pace of the economy.

For India, the obvious advantage is increased capital flows. The party goes on much longer! BTW, cheer on retail investors, CIL has listed at Rs100 premium! Go beserk, pop those Champagne bottles...but be a bit sanguine...CIL trades at PER of 17-18x one year foward, people may say Neyveli Lignite trades at 20x, so why not CIL? My point is, no matter what it is, commodities can not trade at teen multiples! They are commodities after all! Warren Buffet has a point when he says he stays away from commodities, its because when the cycle is down there is little you can do to offset the downfall in demand or increase in price. Anyways for now, it will all be hunky dory because there is Rs30,000cr of money waiting to be pumped in the markets. Jai Ho for some time then....

Long Break

Hi All (All? I am my only follower!)

Long break, I am in a different job profile and a different city. Joined IDBI Asset Management...yes, took that long awaited jump to the buyside! And subsequently shifted to Chennai. Chennai, closer to my home town Bangalore does offer certain advantages...5 hrs drive from Ghar...I do it quite often in my trusted Maruti Ritz (awesome vehicle!). Laid back. Commute is a cake walk...total of 20mins in a day since I stay like 2 kms away in Santhome.


Markets have gone one way since I last wrote...Nifty scaling 6000, Sensex 20,000. This after a gap of 3 yrs. I remember markets in January 2007, all time high, I was just married and still in broking. Things which are different from then:

1. Ample liquidity: Liquidity, liquidity and more liquidity! One more time...ample liquidity! Coal India IPO draws a 20x plus over subscription from QIB book! What's that? INR2000bn worth of money in the system dude! Consider this...CIL money comes back in the system, stays parked coz lots of juicy offers are around the block...Power Grid next month with INR80bn, SAIL with the same amount, IOC early next calendar with a bigger FPO than CIL! Nobody wants to miss these quality issues...hence the money will get distributed in the system, both equity and debt! Gautam...be happy man...Baalu sir too...strong yields plus robust markets...heady combo
2. Nifty is the king: Maximum run up was seen in Nifty and CNX 100. Consider this...without ANY effort, my model portfolio with lame management skills managed to deliver 5% plus absolute return per month...just on Nifty stocks! Take a bow Tata Motors (40% plus), Bajaj Auto (30% plus), Ranbaxy (I knew you would win!) and so on...
3. FMCG/Pharma, no longer defensive: When was the last time you saw ITC deliver a 11% absolute return in a month's time? Or, for that matter...Sun Pharma? Well, they did in this bull run...nothing defensive about their returns mate!
4. Absent Midcaps: No more shady circuits and continuous circuits for unheard of stocks...quality run up.

July on, the FIIs were grabbing up any kind of selling which was happening from Domestic institutions, like always...we grabbed on too late and stopped selling sometime last month. Sectors which were darlings in the initial leg were banking and auto (SBI, I Bank, BOB, Bajaj, TAMO), then came support in the form of FMCG, Pharma, oil&gas, metals, laggards were power generation, capital goods & telecom, IT and Realty were in line/neutral.

I will write in detail about each sector periodically...as and when time permits, apart from macro stuff.

Keep reading!

Disclaimer: All blog posts are made in my personal capacity and do not, in any way, reflect on IDBI Asset Management Ltd. and my position here. All views shares are entirely my own and do not reflect the views of IDBI Asset Management Ltd.

More to go

Interesting point where we stand in today's market. Domestic triggers seem positive with a healthy saving rate, positive cues from the government about oil deregulation and disinvestment, strong balance sheets of good quality companies. We seem ready for the next phase of growth. Of course, caution is needed considering that the global economy is still struggling to find its feet with a major part of Europe to report GDP de-growth.

Oil demand has now fundamentally shifted to newer participants like Asia and China/India will lead demand once the economy properly recovers. Oil can be range bound between $60-$70 till such time. Exploration activity has shown signs of picking up but early days yet.

Valuations have undergone a dramatic shift across sectors, particularly for mid caps. Analysts are at a loss to justify fresh buys and mostly are going with the flow for the moment. Since markets have not stabilised and we are still in the transition phase, it becomes difficult to assign relative valuation measures to stocks. It becomes additionally difficult as global companies can not be strictly compared with domestic peers due to different growth and operational parameters.