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Tuesday, November 4, 2008

Investment strategy in bear markets

Why BSE Sensex crossed 10,000 mark? Have you find any significant changes in the fundamentals of Indian economy? Will FIIs stop selling Indian stocks? Don't be fooled by the statements of FM and industry heads.

This is a classic bear market rally. Just see the top 10 gainers list. You will find no significant reason behind the rise in at least 5 stocks means just short covering. Current markets are only suitable for traders and ultra short term investors who can spot the rallies. Long term investors will be irritated by frequent rise and fall in even good stocks. This trend will continue for some more months. In between, we will get sharp rallies to 12,000 and shock treatments to below 7,000 levels. Prepare for uncertainty and plan accordingly.

Government should concentrate on how to stop dollar out flows, how to raise domestic consumption and protect exports or job losses. Easiest thing among the three is "stimulating domestic consumption by providing growth opportunities and creating new jobs". That is what China is now doing and India should follow this strategy immediately. It is very difficult for us to protect export sectors due to severe global crisis. It is better to concentrate on domestic consumption.

My GDP growth target for India is around 6.5-7%. I don't believe in the statements of RBI and Finance Minister.

Significant statements on economy:

1. "Global crisis had adversely impacted corporates, banks and investor sentiment" Indian Prime Minister Manmohan Singh. PM urged industrial bodies not to go for large scale layoffs.

2. "I think it's definitely a recession at this point. How deep, how steep and long it's going to be is uncertain. We don't know if it's going to be a garden variety recession or something steeper. I think it's most likely to be of a fairly moderate size," – US policy maker Laker.

3. US economic recession will continue till end of 2009 - A survey of top American economists. They failed to predict current crisis despite sweeping Nobel Economics awards in recent years.

Financial statistics:

1. Total loss for Indian mutual fund industry in October is around Rs 1 lakh crore. Industry lost 20% of its AUM. Reliance Mutual fund lost 30% of Asset Under Management.

2. World stock markets lost $5.79 trillion in October – Biggest ever monthly loss in the history. Stock markets lost $4 trillion in September – second biggest monthly loss in history. Equity investors lost $16.2 trillion in 2008. Hungary is the worst performing stock market (43% loss) in October while Pakistan is the performer (4% gain) in the last month.

3. India's exports growth slumped to 10.4% in October – 18 month low. Trade deficit increased by 53% in April-September 2008.

4. 20% England households will have more mortgage debt than the value of their property by 2010. Shocking news. This negative equity will collapse the consumption capacity of the people. UK will be severely affected due to this crisis than any other major European country. England will see 1% contraction in GDP 2009.

5. China's manufacturing output is falling at the fastest rate since figures began to be recorded. It will be very difficult for any exports based industry to recover from this crisis in the next 6 months.

Positive economic news:

1. Crude oil price fell to below $65 per barrel levels despite OPEC oil cut news due to less demand.

2. ICICI bank rating is stable – Moody's.

3. ATF price for domestic airlines will be further reduced by Rs 2,100 per kilo litre.

4. Cash rich The Religare Enterprises- promoted mutual fund, Religare Aegon, plans to buy the Lotus India mutual fund.

Negative financial news:

1. American Express lay off 200 Indian employees. 10% of workers at Tirupur textile units will lose jobs. Aviation, Textiles, Jewellery, IT, Realty and Auto sector employees will feel the heat in the coming months. Most of the Indian Companies may go for salary reduction instead of large scale layoffs in sectors like IT and aviation.

2. Retail home loan defaults are on the rise in India.

Global economic slowdown:

1. USA: Manufacturing in United States contracted at the fastest pace in 26 years. This much worse than analyst's estimates and is the lowest level since 1982. My range for Dow Jones is 6,000-6,500 but investors still do not understand the seriousness of this crisis. This crisis is much worse than 2001 and 1991 recessions. Ford motors car sales fell by 30%.

2. Europe: "Our economy probably entered a recession this year and will stagnate in 2009" – European Union. EU showing worst economic growth after 1993. Economic growth fell to 0.2% in the second quarter. Job losses are at the fastest rate since 2002.

3. Commodities: Price drop is indicating that US is heading for longest recession since 1981. Industrial raw materials fell at an annual rate of 56% last week. Worst price drop since 1949.

4. UK: Manufacturing sector shrunk for the six month in row in October.

5. US electronic retailer Circuit City closed 20% of shops and lay off 17% of its employees. This is surprisingly shocking news before Christmas shopping season.

6. USA: AIG is still feeling heat despite $143 bailout package. What will Government do? Will it continue to fund?

Company results analysis:

1. Tube Investments of India: Excellent results. Electric vehicles maker announced 50% increase in sales and 160% rise in net profit. This is a must have stock in any "emerging investor portfolio". Long term investors can accumulate on every fall. "Nano" door frame contract and falling steel prices are big positives. Future growth will come from electric vehicles.

CMP: 29; P/E: 6; Book value: 39.

2. Southern Online Bio Technologies:

Excellent results and turnaround story. Bio-diesel company announced 180% increase in sales while net profit is 0.83 crore Vs net loss of Rs 0.4 crore. Visionary investors should follow this stock. This is the first listed manufacturing company of bio-diesel in India. High valuations are a concern. I am blindly accumulating this scrip with a 2-3 year view while I am taking risk with IKF technologies with a 6-7 year view. I will become either a fool or a visionary due to these risky long term investments.

CMP: 11.3 (BSE); P/E: 28; Book value: 17.

3. Pennar Industries: Good results. Company reported 34% increase in sales and 74% rise in net profit. It is planning to enter railway wagon business (safe) to continue its growth momentum. Investors can accumulate it around Rs 20.

CMP: 30 (BSE); P/E: 9.7; Book value: 11.

4. Chowgule Steamships: Good results. 100% increase in sales and 200% rise in net performance. Baltic Exchange Dry Index lost 90% value in 2008 and shipping industry will continue to suffer. We have to see how this small player will face global recession. Company is sitting on huge debt.

5. Era Infra Engineering: Decent results. Company announced 60% increase in sales and 40% rise in net profit.

Good performance: Havells India, Gayatri projects, Logix Microsystems and Hawkins Cooker.

Poor Performance: Indoco Remedies (worst performance), IVR Prime, KEI Industries, Shopper' Stop, Royal Orchid Hotels, Puravankara Projects and Gokaldas Exports.

Good articles on economy:

1. How to cure American economic crisis?

Global economy is moving from bad to worse and bailout packages are not yielding significant results. FIIs will continue to sell and consumption will fall across the world. Long term investors should keenly follow best companies in good sectors which recently announced wonderful results and accumulate them on every major fall to build a great portfolio.

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