Value-Stock-Plus

Informed Investing!

Investing is most intelligent when it is most businesslike - Benjamin Graham (1894-1976)

____________________________________________________________________

Value-Stock-Plus stands at No. 50 in the list of Top 100 Finance Blogs  by ValueWiki

Recognised by The Economic Times as one of the most popular financial blog

Updated! Compilation on Warren Buffett, Rakesh Jhunjhunwala & Charlie Munger
____________________________________________________________________

« Home | Run down on 'capex-led' growth! » | Are you buying a retailing story? » | Of poison pills and white knights! » | P/E ratio: Look beyond it! » | Of poison pills and white knights! » | Back to Basics Click here to download the report. » | Magic of Equity + Power of Compounding = ??? » | Why there is variation in global stock returns? » | Pantaloon: Double or Quits? » | Murky World of Stock Forecast »

Stockmarkets: Where to from here?

The BSE Sensex has had an exciting run since the month of May this year. That is, of course, if volatility is something that excites you! In May, the benchmark index hit it's all-time high levels of around 12,671, and was seemingly on a non-stop upward move. However, it should be noted that all that goes up must come down, which is better known as the law of gravity, but is very much applicable to the stock market as well. Thus, we saw the Sensex crash from its highs of 12,671 on May 11 to a low of 8,799 on June 14 - a fall of nearly 31% in barely over a month!

Now, a number of investors were crying hoarse about how much money they lost after buying stocks at the highs and selling at the lows (which, of course, is the opposite of what an investor must do to make money in stocks). We heard horror stories about how people lost fortunes by leveraging too much - clearly a case of biting off more than one can chew. However, we were always uncomfortable with the way the Sensex was moving non-stop in the upward direction, a clear sign of overvaluation, and had been advocating utmost caution much before the Sensex came even close to these high levels.

The markets have again moved up from their lows, as buying has resumed at 'more reasonable' levels following the crash. What can investors now expect from the Sensex? Any number of views abound on the street, with some quarters giving 7,000 as a possible target, while others give another extreme target of 15,000! We refrain from giving any such number, as we do not predict index levels. We believe that it is better to adopt a bottom-up approach and select the best stocks that have the potential to give superior returns over the long-term. We examine here, a few macro factors taking place that could impact the stock markets and specific sectors.

A higher interest rate environment For too long, there was a global party, with all-time low interest rates prevailing in major economies globally, including the US, Australia and Japan. This caused money to flow out from those economies into the 'emerging market economies', such as India. Global risk appetite increased significantly, with funds from developed economies scouting the globe for investment opportunities, since their markets hardly offered any meaningful returns. Thus, we had a strange scenario, where fund managers from the US invested in crude oil, gold, commodities, real estate and other such investment avenues, as well as emerging market indices. This caused the bull runs across these asset classes, a unique, unusual and highly risky situation indeed.

However, with the US Fed resorting to a hike in interest rates, this risk appetite has reduced. Now, with higher-yielding US treasuries, some amount of outflows could be seen from emerging markets over a period of time. Given the Indian markets' dependence on FII money, this might have an impact. However, we believe that, despite rising interest rates, given Indian companies' strong fundamentals and growth prospects, these will continue to do well, and consequently, their stocks should also do well on a macro basis.

Higher crude prices This is certainly one variable that could slow down Indian and global growth to an extent. There have been no major new finds of crude over the past three decades, and given ever-increasing demand from countries like China and India, crude oil prices may not soften in a hurry. Higher crude prices act as a 'tax on growth', since countries need this valuable commodity to run their economies, despite the fact that prices may increase. Sectors that could get impacted are energy (specially oil marketing companies), sectors like paints that use crude-based raw materials, auto, petrochemicals and shipping.

Commodity prices We are of the view that over a longer period of time, steel prices will trend downward, and are now at a stage where they are going into a downturn, as opposed to the strong upturn seen, peaking in FY05. This will have the beneficial impact of reducing the cost of raw materials for sectors like auto, construction and engineering, which use steel as a major raw material. On the other hand, steel companies will be negatively impacted, due to lower realisations.

Other factors Geopolitical factors like the recent Israel-Lebanon conflict and North Korea's nuclear programme have the ability to impact sentiment, although they might not necessarily have an actual impact on the country. Given that India is becoming increasingly integrated with the global economy, this factor cannot be discounted. The 'political factor' could also play its part.

A stable government is always a positive factor, and an unstable Centre is certainly not in India's interests. Nonetheless, it also needs mention here that despite the political turmoil that India has seen in the past, the economy has still grown at an average of around 6% per annum over a long-term period.

Conclusion We believe that it does not make too much of a difference as to what level the BSE Sensex is trading at. What is more pertinent for an investor is the level at which the stocks that he or she wants to buy are trading at. We firmly believe that, in such times, a bottom-up approach would serve investors the best. Always consider the risks in your investment, such as the ones mentioned in this write-up, and go for strong companies that are likely to stand the test of time.

Additional Readings:
  • Rakesh Jhunjhunwala's latest portfolio at theequitydesk.com
  • Fingers of Instability
  • Brokers are bullish on PVR, HBL Nife, Sterlite Optical
  • Take a bottom up approach on midcaps: Motilal Oswal Sec
  • Expect some selling to come in September: Investshoppe
  • Cement, property stocks rule the roost among midcaps
  • Can invest in riskier assets for now: JP Morgan
  • Internal Indian mkt scenario is quite robust: Choksey
  • Prefer SpiceJet in aviation sector: Edelweiss Capital
  • KRBL looks attractive at this price level: Religare Sec
  • Why Stock Prices Move
  • Beware booming asset markets! by Dr. Marc Faber
Additional Reports:
  • Global Outlook - Citi SB
  • India Strategy - AB
  • Power Sector - JPM
  • Sugar Sector - SBICaps
  • Airlines Sector - Brics
  • Asia Rally to continue - MS
  • India Strategy - MS
  • SSKI Technical Analysis
Off-Topic Readings:
  • Global brokerages want retail action
  • The birth of India's global giants
  • Palm CEO on mobile manners
Parting Thought:
  • With enough inside information and a million dollars you can go broke in a year. - Warren Buffett

Posted by toughiee on Sunday, August 27, 2006 at 2:03 PM | Permalink

Post a Comment

Search


Compilations

  • Warren Buffett
  • Charlie Munger
  • Rakesh Jhunjhunwala

Previous posts

  • Run down on 'capex-led' growth!
  • Are you buying a retailing story?
  • Of poison pills and white knights!
  • P/E ratio: Look beyond it!
  • Of poison pills and white knights!
  • Back to Basics Click here to download the report.
  • Magic of Equity + Power of Compounding = ???
  • Why there is variation in global stock returns?
  • Pantaloon: Double or Quits?
  • Murky World of Stock Forecast

Archives

  • November 2005
  • December 2005
  • January 2006
  • February 2006
  • March 2006
  • April 2006
  • May 2006
  • June 2006
  • July 2006
  • August 2006
  • September 2006
  • October 2006
  • November 2006
  • December 2006
  • January 2007
  • February 2007
  • March 2007
  • April 2007
  • May 2007
  • June 2007
  • July 2007
  • August 2007
  • September 2007
  • October 2007
  • November 2007
  • December 2007
  • January 2008
  • February 2008
  • March 2008
  • April 2008
  • May 2008
  • June 2008

About This Blog

  • Get on Mobile
  • Atom Feeds
  • Disclaimer
  • Email to Owner

Blog Directories

  • Stockblogs

Related Blogs

  • DeepWealth
  • Dardashti
  • Ridgewood Group
  • Trading Day by Day

Business Papers

  • Economic Times
  • Business Standard
  • Business Line
  • Financial Express
  • DNA Money

Business News

  • Capital Market
  • Equitymaster
  • India Infoline
  • Moneycontrol.com
  • Yahoo! India Finance
  • ICICIdirect

Results

  • India Earnings

Quotes & Stats

  • Asian Indices
  • All Indian Quotes
  • Indian ADRs
  • Indian GDRs
  • Arbitrage
  • Sector Classification
  • FII Trends
  • MF Trends
  • NSE Heat Map
  • Insider Trading
  • BC/RD
  • BM (Company)
  • BM (Date)
  • BSE Bulk Deals
  • NSE Bulk Deals
  • NSE Block Deals
  • US Indices
  • US Pre-Market
  • US After Hours
  • CBOE VIX
  • European Indices
  • Commodity/Currency
  • Nymex Light Crude Oil
  • Nymex Natural Gas
  • Nymex Gold
  • Nymex Silver
  • Nymex Copper
  • All In One

Equity Analysis

  • Kotak Street
  • Moneypore
  • Geojit
  • IDBI
  • Naviamarkets
  • ET Big Bucks
  • BS Smart Investor
  • FE Investor
  • BL Investment World

Screeners

  • Equitymaster
  • ICICIdirect

Research Reports

  • Moneycontrol

Technical Analysis

  • ICICIdirect
  • Yahoo! Finance

E-Books

  • Value Investing
  • Trading & Technicals
  • Gann
  • Elliott Wave
  • Risk Management
  • Derivatives

Misc. Links

  • BSE
  • NSE
  • SEBI
  • SEBI Edifar
  • Corp. Filings
  • WatchOutInvestors

Global Research

  • Morgan Stanley GEF
  • Hussman Funds

Interactive

  • Online Chat
Subscribe to this blog's feed
[What is this?]
Powered by Blogger