Investment Avenues For 2009

Circa 2008 A.D. The year began with a bang and is about to end with a whimper. 2008 will go down in the history of the Indian stock market as the 'Year of Pinnacle & Nadir'. The market went up to dizzying heights at the beginning of the year and thereafter it crashed precipitously to a third of its peak. It took just the year 2008 to lose what it took three years for the market to gain! What a tumultuous year it turned out to be! Let us walk through the ups and downs of the market to understand what the future holds for us.

Starting with a Bang!
At the dawn of the year 2008, there was euphoria all around and everything and everybody was on Cloud 9. The Sensex and Nifty were touching their all-time highs every other day and stock market investors were having a party of their lifetime. It seemed like the party would never end and celebrations would go on for ever. The Sensex had already crossed the 20,000 landmark even before the dawn of the year 2008 and was racing skyward full throttle even in the first 10 days of 2008. The benchmark crossed the 21,000-mark intraday on Jan 8 & 9 and posted its intraday lifetime high of 21,206 on Jan 10, while it posted its highest close of 20,869 on Jan. 9. The stupendous bull run, which started in May 2003 at the Sensex level of 3,000, reached its zenith at 21,000 in January 2008, recording a stupendous gain of seven times in just four years and nine months and giving a compounded annual return of over 126 per cent. There was feel-good factor all over and almost everybody bragged animatedly about the huge profits (albeit, mostly notional) they had made on their investments and dished out their own projections (to whoever was willing to listen) about Sensex heading for 30,000 in the next 3 months or even 50,000 within a year! Those were the heady times for all investors who had invested in the market.[PAGE BREAK]

Feel Good Factors
At the start of the year, the market and marketmen were going gung-ho because everything was looking good. All the macro-economic indicators were favourable, suggesting that the economy was in fine fettle. The GDP growth rate was at a healthy 9 per cent for the fiscal year 2007-08, while the inflation was low at 4-5 per cent at the beginning of the year. Although the interest rates were on the higher side (with PLR in the range of 12-13 per cent), the many positives took care of the high interest rates. The foreign exchange kitty was growing with each passing week and had swelled to USD 292 billion by the end of January 2008. All these favourable macro-economic factors were amply reflected in the upbeat mood of the stock market. 

The Liquidity Push
The rupee had relentlessly appreciated against the green-back and had touched Rs 39.27 to a dollar in January 2008, which meant that more dollars could be had for given amount of rupees. The foreign institutional investors (FIIs) were pumping in money like mad to not just to make a killing from the relentless rally in the stock market but also to multiply their profits by buying dollars with their rupees. After having pumped in over USD 17 billion (net) in 2007, the FIIs maintained the tempo of their investments by putting in over USD 787 million in the first eight working days of the year. No wonder, with everything looking good, the markets were on fire. Taking cue from the FIIs, even the Indian financial institutions (FIs) pumped in money to the tune of Rs 6,661 crore (net) during 2007. The upbeat mood was evident from the fact that even in January 2008, the FIs invested a whopping amount of Rs 7,700 crore (net). Not to be left behind, most of the retail investors too joined the bandwagon and were on a buying spree. While the informed investors bought shares of blue chips for the long term, the uninformed ones bought momentum scrips based on tips from their brokers, friends, colleagues and relatives. That there was euphoria in the market became evident when even paanwallas and chaiwallas started putting in their money to make a quick buck. The smarter ones among the institutional and retail investors booked hefty profits and were smiling their way to the banks.[PAGE BREAK]

The IPO Party

It’s not just the retail and institutional investors who were having a ball till the beginning of this year. The year 2007 was a great year for the corporates too. They were raking in the moolah by coming out with public issues at the best possible premium they could get in a buoyant market. 

The resounding success of Reliance Power and Future Capital IPOs was an indication of the upbeat mood in the market. While Reliance Power IPO was to the tune of Rs 11,700 crore and was oversubscribed by over 73 times, Future Capital Rs 491 crore IPO was oversubscribed 133 times! That these issues could get such overwhelming response and raise such huge amounts from the market only goes to indicate the extremely bullish sentiment then prevailing in the market.

The Great Fall

But after the great rise, came the great fall. The downhill journey began slowly in January after the market touched its all-time high but picked up after February and March and accelerated in October. The fall was so precipitous that over 12,000 points were lost in just about nine months, making it the steepest fall in the history of the Indian stock market.

The fall-out of the market crash was so profound that almost all stocks, including the blue chips, took a huge beating. Market heavyweights such as Reliance Industries, Infosys, L&T, SBI were battered down heavily. Reliance fell from its peak of Rs 3,298 to a low of Rs 930 and is currently trading around Rs 1,240. IT bellwether Infosys fell from its peak of Rs 2046 to Rs 1040 and is now trading at Rs 1080. Even engineering giant L&T tumbled from Rs 2,205 (adjusted for 1:1 bonus) to Rs 670 and is presently trading at Rs 750, while public sector banking heavyweight SBI fell from its peak of Rs 2,574 to Rs 965 and is currently selling at Rs 1,150. If these blue chips stocks have taken such a huge beating, one can imagine the plight of other scrips. Among the sectoral stocks, the real estate scrips were the worst hit, with Unitech crashing from its 52-week high of Rs 546 to a pitiful low of Rs 21, a huge loss of over 96 per cent, and currently trading at Rs 33, while DLF nosedived from its high of Rs 1,225 to Rs 154 (loss of over 87 per cent), and is presently available at Rs 254.[PAGE BREAK]

Primary Market Fall-out
The fall in the secondary market spooked the primary markets too and the pipeline of IPOs went almost dry in the second half of 2008. The market sentiment was so weak that only 33 companies tapped the primary market during the year. Out of these 33, a majority of 26 companies came out with their IPOs in the first half, while six companies came out with their IPOs in the third quarter and just one company in the last quarter of 2008. 

This clearly shows how the sentiment went from bad to worse as the year drew to a close. Much worse was the plight of the primary market investors. Out of the 33 companies listed, investors in as many as 30 companies suffered losses, while investors in only three IPOs made good money. The three companies which gave excellent returns were Anu’s Laboratories (Issue price: Rs 210, CMP: Rs 300), Vishal Information Systems (Issue price: Rs 150, CMP: Rs 295) and Alkali Metals (Issue price: Rs 103, CMP: Rs 121). However, the losses suffered by the investors in the 30 companies range from 20-50 per cent and, in some cases, as high as 80-90 per cent. The depressed sentiment forced some of the companies such as Emaar MGF and Wockhardt Hospitals to shelve their mega IPOs as they were not sure if their issues would be fully subscribed.

Plethora of Negatives
But what caused the market downfall? The causes of market crash were many, but the triggers ironically proved to be external factors rather than domestic factors. The external factors were the sub-prime crisis in the US, the collapse of the American investment banking and insurance giants and the consequent exodus of foreign investors, sharp spike in global crude oil prices and the weakening of the dollar against the rupee. The internal factors were rising inflation, rising interest rates, rising crude oil prices, declining GDP growth rate, FII selling, liquidity crunch, etc. Let’s examine all these internal and external factors in detail.

Financial Mess in the US

The first blow for the market came with the sub-prime crisis in the US and the second and bigger jolt came when investment banking and insurance giants in the US began going bust. The sub-prime crisis erupted in mid-2007 while the collapse of investment banking and insurance giants  such as Bear Stearns, Lehman Brothers, Washington Mutual, Wachovia, AIG, etc. began this year. The ripple effects of the sub-prime and financial crises in the US began to be felt among the European countries within 6 months and the full impact of the crisis began to be felt across the world in the second half of 2008. India was no exception and has been reeling under the adverse impact since September-October this year. This has completely blown up the myth of decoupling of our economy from the Western economies.[PAGE BREAK]

In fact, the unprecedented rally in the stock market was primarily the result of huge inflow of foreign funds from 2004 till end-2007. The financial crisis forced the foreign institutions to liquidate their portfolio investments in emerging economies such as India to meet their own liquidity requirements back home. What followed was an avalanche of selling that caused the prices of stocks to collapse not just in India but across the global markets. 

Crude Oil Price Spike Scalds
The sharp spike in international crude oil prices in the first half of 2008 burnt a deep hole in our forex kitty and fuelled inflationary spiral. The international crude oil prices went up sharply from around USD 87-90 per barrel in December 2007 to USD 147 per barrel in July 2008, a huge jump of over 50 per cent in just about 7 months.This super spike in oil prices not only led to increased subsidy burden on the government, but also fuelled inflation as the government was forced to pass on some of the burden to the consumers.

The Internal Factors
The internal macro-economic factors were also turning negative with inflation climbing to double digit figures by mid-2008 and touching the highest at 12.90 per cent in the first week of August. To contain inflation, the Reserve Bank of India had to adopt tight money policy and gradually hiked the interest rates, with the PLR touching 14 per cent in August. The GDP growth rate too had started decelerating and by the third quarter of 2008, it had dropped to 7.5 per cent. The rupee too had started depreciating against the dollar and touched a low of Rs 51 per dollar, which proved to be a strong disincentive for the FIIs as they suffered exchange losses, thereby trimming their profits or increasing their losses on their investments.

Where do we go from here?
At this point of time, one can say that equity markets have shed most of the flab they had put on during the last three years of bull run and have now become fit and trim. Even if there is any flab left, it won’t be much, so one can safely assume that there may not be much of a downside left from here. Most of the macro-economic negatives have also been discounted by the market, and one can expect these negatives turning into positives over a period of 12-18 months. In fact, the positive signals emanating from the macro-economic front suggest that the worst is probably over and we can expect to see consolidation and stability in the stock market for some time to come. Although no one expects the market to revive any time soon, the likelihood of the market tanking any further going forward appears remote too.Also, it can be said that the valuations have become attractive and most of the blue chip stocks are now available at almost rock-bottom prices. An investor with an investment horizon of 2-3 years can certainly think of entering the market and expect excellent returns in the next 2-3 years.[PAGE BREAK]

India Inc. too has been on a cost-cutting spree and has undertaken the exercise to cleanse the system by removing the deadwood from their balance sheets and become lean and mean. Companies which would survive this economic slow-down would come out stronger and fighting fit. This would be reflected in healthy growth of their toplines and bottom-lines in times to come. This should also make buying them an attractive proposition.

Mutual Funds
Mutual funds invest heavily in equities and hence the performance of mutual funds is subject to the performance of the market. Since the markets have been down in the dumps since last six months or so, so are the mutual funds. The NAVs of all equity-oriented schemes have taken a huge beating due to the market downturn. This is evident from the fact that over the one year period, the NAVs of equity funds have depreciated by over 52 per cent, while over the last six months, the NAVs have declined by 43 per cent and during the last three months, by as much as 35 per cent. But as stated above, all the negatives have been discounted in the prices of the equities and that the downside, if any, would not be very much. Hence, if it’s time to buy equities, it’s time to buy equity-oriented mutual funds too.

Real Estate Scenario
The scenario in the real estate has been quite gloomy in the second half of the year and this situation is likely to continue for a while and there is likelihood of the prices correcting further in certain pockets of metros such as Mumbai, Delhi, Bangalore, Hyderabad, Gurgaon and Noida. The demand for real estate is growing, but the spurt in prices over the last few years in certain residential and commercial localities created a bubble which was bound to burst sooner rather than later. The bubble has burst sooner than the developers expected and they have been now saddled with unsold properties and are facing cash crunch. The buyers have postponed their buying decisions as they expect the real estate prices to fall further. The high interest rates on home loans have also proved to be a dampener for buyers of residential properties, who are also waiting for the interest rates to soften going forward. The demand for commercial properties has also got impacted due to the global economic slowdown, the impact of which is being felt by Indian corporates.

Hence, the prices of commercial properties as well as lease rentals are expected to correct further or remain flat for the next six months. Overall, real estate investors should adopt a wait and watch policy to find out how the situation pans out in the coming months. The stimulus package announced by the Central government also attempts to provide a boost to the real estate sector by classifying home loans for properties costing less than Rs 20 lakh as priority sector lending and injecting Rs 4,000 crore in National Housing Bank. However, the priority lending status may not mean much and it may prove to be inadequate in view of the prevalent high interest rates on home loans.[PAGE BREAK]

It is felt that the RBI needs to reduce the interest rates by at least 200 bps so as to make a visible impact in credit growth for the housing sector.

Golden Glitter
In the gloomy scenario, it was gold which kept glittering during the year. The international prices of gold hovered between Rs 34,000 to Rs 44,000 per ounce (Rs 12,000 to Rs 15,500 per tola) during the year and indications are that gold prices may remain firm in the days to come. Gold as an investment is considered to be the safest and, therefore, the lure of gold for Indians will always remain. The demand for gold will always be high in India, especially during festival and marriage seasons. India is the largest consumer of gold due to this tendency of Indians to hoard it (in the form of ornaments). Investors who are looking for safe and secure investment yet expect to get steady and decent returns can buy gold in the form of coins which are available with various banks.