When the dust settles down- financial earthquake and aftermath

Inevitable question is what action the investor should take at this time of intense turmoil. A long-term investor will be justifiably paranoid that market is just waiting for him to bail out before it starts rebounding. On the other hand, it is becoming increasingly painful as the market keeps on heading lower.

An analogy to earthquake might help in determining a course of action. We are at a stage where buildings are crumbling down and there is state of confusion and panic. Everybody is running helter skelter, there is haze and dust and nobody yet realizes the extent and differentiation of damage.

When the dust settles down, what will people see? It is for sure that no building would have escaped damage; they were all linked. However, some economies would have suffered more while some others slightly less. An important question will be about the comparative and differential future of various economies.

In my note Sensex, Music & Headphones of June 27, 2008, I wrote that Indian economic growth of 7.5% in the face of sub par growth in USA will be noticed. A board comprising of prominent Indian economists on October 27, 2008 forecasted a growth of 7.5% for both 2008-9 and 2009-10 in spite of current global turmoil. I have repeatedly emphasized ‘strategic global shift’ and the painful nature of such shifts in my numerous previous notes. The current events will perhaps accelerate and make more visible such a shift.

Morgan Stanley in its note of October 13, 2008 echoes the same thoughts. To quote from their report ‘ we believe the world economy is in a painful transition to becoming Emerging Markets led. Our economics team’s forecasts now envisage that 100% of all GDP growth worldwide in 2009 will originate in Emerging Markets. However, the denouement to the structural issues that have built up in developed market financial systems and economies is leading to global deleveraging and reducing demand for Emerging Market assets. Yet, despite the massive undershoot of the last few months, the underlying bull market in Emerging Market equities vs. Developed Markets equities is probably intact. We are upgrading our stance on Emerging Market equities to our maximum overweight of 10% above benchmark.’

If we look at the recent statements of legendary investors, they are all utilizing the current sell off to bolster their positions. Warren Buffet in a widely publicized statement on Oct. 20, 2008 said ‘ a simple rule dictates my buying: be fearful when others are greedy and be greedy when others are fearful. And most certainly, fear is now widespread’. Barton Biggs finds the current levels to be very attractive for buying worldwide. He particularly singled out India as an over penalized market in spite of good economic fundamentals.

I always mention three sacrosanct principles of investing in volatile assets. To emphasize again, these are time horizon, diversification and valuation. Current events prove that time horizon is of utmost importance. It helps in giving us the holding power for overriding and withstanding the storm and finding a profitable exit at an opportune time. My recommendation therefore will be to hold on to your existing investments. For fresh lump sum funds, I will advise dividing them into tranches and investing in a systematic way. For NRI investors, allocation to India assumes even a greater importance and the current currency levels are favourable.

Dr Sanjiv Mehta is the MD, Finance Doctor, a wealth management company and author of Winning The Wealth Game: Cricket Strategies For Financial Freedom.

Wall Street debacle- an impetus to global strategic shift?

With Lehman failure and continuing global financial turmoil, all markets including Indian equities are showing a major decline and are likely to be under pressure for some time. However, buried within the stories of grim scenarios there are some interesting statements.

In the Economic Times of Sep.16, 2008, in a story titled ‘City bosses look East’, Stuart Fraser, policy chairman of the City of London, which is responsible for running London’s financial district said “globally and in the medium and long term, nothing changes the fact that economies such as China, India, Brazil and others are growing fast and will need financial services to help them in that growth. These are major medium term opportunities for City of London”.

In another story related to lay offs at Lehman and Merrill Lynch, Ambit Holdings, which is an Indian investment banking firm, announced that they had recruited Merrill Lynch’s Andrew Holland and his whole team on their equity proprietary team. It also mentions that a host of other Indian investment banking firms are looking at hiring some of the officials from these companies.

Mark Mobius, Executive Chairman of Templeton asset management and who manages about $40 billion in emerging-market stocks said in an interview to Bloomberg “Bank of America’s deal to take over Merrill Lynch and a U.S. pledge not to bail out Lehman indicate that financial markets are near the bottom. The U.S. Federal Reserve's plan to broaden a lending program, is also good news-these people are getting their acts together and making decisions that I think will really help a lot to stabilize financial markets around the world’’. Mobius also mentioned that he is increasing stakes in emerging-market banks and financial institutions. JP Morgan strategists led by Adrian Mowat have also advised investors to focus on economic fundamentals and areas of good economic growth rather than on the current movement of financial indices.

In my article ‘Sensex, Music & Headphones’ of June 27, 2008 I had written ‘ Presently we are in a transitional stage of this global shift of multiple dimensions and transitions could be slow and painful. There has been a lot of debate about economic decoupling and while it will be fallacious to expect a complete decoupling, Indian growth at 7.5-8% in the face of USA sub par growth will be noticed.

So while staying on the sidelines for any fresh investments will be prudent during this major crisis, from a medium term perspective, attractive buying levels seem to be developing in the Indian markets. Therefore, I will recommend holding on to your existing investments and adopting a systematic investing method for fresh funds.

Principles of appropriate time horizon, diversification and valuation remain sacrosanct as always.

Dr Sanjiv Mehta is the MD, Finance Doctor, a wealth management company and author of Winning the Wealth Game: Cricket Strategies for Financial Freedom.

Indian Nuclear Deal & Cautious Optimism about Indian Market

Indian markets went up by 600 points when a major hurdle of seeking waiver from Nuclear Suppliers Group (NSG) was crossed. Indian Nuclear Deal has been debated tremendously but the overall view is that strategically it will be beneficial for India in numerous ways. Apart from achieving higher energy independence and being able to sustain rapid economic growth, India will have access to important technologies in diverse areas including pharmaceuticals and space. Consequently, it will be able to leverage its existing advantages of favourable demographics and skilled workforce even more effectively.

From a capital markets perspective, this development has again focussed attention on the positive long term Indian story rather than short-term negatives and the present correction. There are some nascent signs that a cautious optimism about the Indian market is emerging. For example, USA market on Sep. 9, 2008 took a hit of almost 3 % while the Indian market as expected opened lower on this major global cue but recovered during the day. Interestingly, midcaps and small caps were in the positive territory. Derivative clues in the shape of Nifty Futures are at a premium for all 3 months. Although the market can be range trading for some time with levels lower than current levels quite possible, a significant upmove from this base could emerge sooner than expected.

My view as discussed and analyzed in my article Sensex, Music and Headphones of June 27, 2008 is that the market decoupling will eventually take place in the medium term although nobody can predict the exact timing. My recommendation will be to initiate, maintain and enhance your allocation to Indian equities with a five-year perspective of healthy returns and without trying to find the lowest point of the current correction. For NRIs, it becomes a nice entry point with Indian Rupee showing a significant correction in its long-term uptrend against USD.

Three principles of appropriate time horizon, valuation and diversification remain sacrosanct.

Dr Sanjiv Mehta is the MD, Finance Doctor, a wealth management company and author of Winning the Wealth Game: Cricket Strategies for Financial Freedom.

Sensex, Music & Headphones

Dr Sanjiv Mehta June 27, 2008

Sensex@ 13922 With Indian inflation at more that 11%, oil at $135 a barrel, weak global cues, political uncertainty, rising interest rates and emerging signs of a slowdown in the economy, Sensex has taken a major nose dive to levels around 14000 and is expected to be under pressure for more time. Investors justifiably are worried about future prospects.

What should an investor do about Indian equity component of his portfolio? Should he just remain there, increase or flee? What should be the percentage allocated? In the earlier articles I emphasized appropriate asset allocation as the most important factor for impressive portfolio returns and harnessing the power of passive income.

Jeremy Seigel, one of the most renowned American professors and who was also my teacher at the Wharton School, wrote a highly acclaimed and deeply researched book ‘Stocks for the Long Run’. He analyzed in detail more than 200-year history of USA stock market and markets of numerous other countries. The conclusion was unmistakable that stocks held for a reasonable time horizon produce much higher returns as compared to other asset classes. It is true that stocks move with lots of fluctuations and volatility but in the long run reflect economic fundamentals.

This is borne out by my own experience. In my column exactly 5 years back, in the Deccan Chronicle on June 27, 2003, I wrote an article titled ‘Now you can invest in India’ –Sensex was then at 3583, accompanied by poor investor sentiment. Good economic fundamentals were just emerging at that time. We have come a long way marked by usual volatility of a stock market- the index reached heady levels of almost 21000 before dropping to current levels. In between there were many moments of uncertainty and amidst all these fluctuations, investors who heeded the advice of following good economic fundamentals and stayed put are the ones who gained the most, with original investment multiplying six times.

The crux, the central issue with market under intense pressure, at this juncture is that whether economic fundamentals are still intact and their impact over the next 5 years. Where would Indian economy be in the year 2013? Factors in BRIC Report by Goldman Sachs that predicted India to be the 3rd largest economy in the world in the year 2050 are still valid. These include favourable demographics, economy driven by local consumption, less dependent on global factors and stability of macro economic environment.

Moreover, Indian economic growth on a comparative basis should continue to do well. Looking at different components of GDP, Services accounting for 60% is growing at 10% and therefore should contribute 5-6% to GDP. Industry, which is 25% of GDP and growing at 10%, will contribute 2.5%. Agriculture growing at 2-3% should also contribute 0.5%. Capital expenditure to the tune of Rs. 34000 crores is expected to be commissioned during FY 2008-09 and it will have a huge multiplier effect. Overall, GDP growth rate is expected to grow at 7.5-8%. This is the most likely consensus view emerging from multiple forecasts including RBI and Economic Advisory Council to the Prime Minister. Indian banking system is also sound with limited exposure to real estate lending or share financing.

With this kind of growth establishing at least a degree of economic decoupling with USA and other developed markets, a strategic shift in global asset allocation may gradually gain momentum. Presently we are in a transitional stage of this global shift of multiple dimensions and transitions could be slow and painful. There has been a lot of debate about economic decoupling and while it will be fallacious to expect a complete decoupling, Indian growth at 7.5-8% in the face of USA sub par growth will be noticed. George Soros, one of the greatest hedge fund managers, in his latest book states that he protected his fund returns by recognizing such an impending shift and investing more in India and China. Combine this with a greater percentage of Indian savings coming into equities, and a scenario of at least partial market decoupling is highly probable.

Recommendation – With a 5 year time horizon, Indian equities should continue to be a significant part of total asset allocation. Existing investors should continue to stay invested. Since short-term pressures are likely to remain for some time, for new investors, a sensible strategy will be to invest systematically in various tranches rather than in one lump sum. Investing should be smart with selection of good funds excelling in picking fundamentally sound stocks at good valuation. Indian rupee again is on a long-term appreciation trend albeit with corrections like the present one that has taken it to Rs. 43 and therefore NRIs should gain from this factor too. Three principles of appropriate time horizon, valuation and diversification remain sacrosanct.

Conclusion - I listen intently to music while being driven in Hyderabad but gradually the joy was decreasing. Noise levels in the city were picking up with rapid growth inevitably accompanied by increasing traffic. Utilizing ‘Acoustic Noise Cancelling High Quality Headphones’ has restored that happiness. Original music is as melodious as ever though the noise is also real and almost led to the false perception as if music itself was distorted. As Shakespeare would say, play on.

Dr Sanjiv Mehta is the MD, Finance Doctor, a wealth management company and author of Winning The Wealth Game: Cricket Strategies For Financial Freedom.