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Sunday, April 5, 2009

2010 Stock Market - How Would Stocks Perform?

Ramesh Damani, Member, BSE, asks market experts about their outlook for the year 2010. Here is a verbatim transcript of the exclusive interview of Madhu Kela, Nilesh Shah, Narayan Ramachandran, Jehangir Aziz and Abhay Laijawala with Ramesh Damani on CNBC-TV18. I am publishing selective part of this interview which could be helpful to you while buying stocks for year 2010.

Damani:2008-09 were watershed years, wasted a lot of investors wealth- what is the outlook for 2010?
Kela: I think we have already been 12-15 months in this vicious bear run. I do not rule out the possibility of lot of events unfolding which are not pleasant, which are not fundamentally good and the news flow which might continue to be bad. However I think the speed of the fall and the confidence of the bear in this market when I look, suggests to me that maybe market has discounted a significant portion of the bad news and as we look at, every bad news which comes in might be an opportunity to buy. However this is not a hunky dory market and I am not suggesting that we are in a bull market, that you are in 2003 and buy a stock and go to sleep and you will make 500%. This is 2008.

This is going to be a tough market to make money and one will have to do much more vigorous work, you have to be very alert and markets will have lot of volatility. So opportunities are going to be there in 2009-10 to make a lot of money.

Damani: Would you sense the bottom we made globally in Dow or Sensex is the bottom going to hold now?
Kela: I am quite confident that the bottom is been made in India at least, I think what we saw in last October, again as fund managers would like to have our back covered, so I must say - if we don't have a catastrophe government which is being formed and the policy reversal in India, some one was telling me that Prakash karat becoming the Finance Minister of India, so that scenarios are different obviously but barring that we may have seen the worst.

Damani: I assume that bears are supremely confident at this point but couple of bears told me one thing- there is a movie called ‘Children of Lesser God’- Are we children of the Bull market because all that we have seen is buying, for 25 years you bought on tips you made money whether it was any asset class real estate, equities- do you think we just don’t know what a period of prolonged economic contraction, credit defaults, de-leveraging looks like and so are we using the models that are not relevant anymore?
Kela: I wouldn’t say that we have not seen the bear market, I have seen stock collapse from Rs 100 to Rs 2 and I have lived through that. So unless and until you are making a case that the whole world is going to collapse and we are going to live in a prolonged period of contraction, possibility of which does exists to an extent of 5-10% in my own opinion but unless and until we are talking of that kind of period, we are not anywhere near the old stories because if you meet a bear in this market he will make a case for long-term story is bullshit. All long-term investing is gone and that it’s a matter of past and has become a history but I don’t think it becomes an history just by few people saying that. These models have held fro 150 years and I have no doubt that this period my last for couple of years but I also have no doubt that the fundamental way of investing in the stock market is ever going to change.

Damani: So buy with a margin of safety, buy value?
Kela: Absolutely, again what is the market telling us from October- people are still debating and discussing. I know at least 50 large companies which are up between 50-100% after the fall and the debate is still on, whether we have touched the bottom or not.

Damani: In a bear market indexes go up 30-40% and Mr Kela said stocks can double- which camp do you belong to?
Shah: I think we are at a time where we can shape history or maybe future. If all of us go and vote sensibly? - will the market have different index, the answer is maybe. This is an era where lot of events ares going to happen and they are going to shape how the markets are going to behave. So as Madhu Kela mentioned Mr X as a FM, no matter what the fundamentals are your index will be in completely different direction. Mr Y, as a FM no matter what the fundamentals are hope will triumph over fear and your index will be in completely different direction.
Yesterday at an award function, I was standing with my fund manager who is far taller than me and they asked a question where will the market go? So my answer was from where I can see it can only go up. And from where he can see it can only go down – so that is the kind of range. In reality it is how we behave that will determine where the index is.

Damani: That’s your job to tell me how the markets going to behave. 2010. Are we going to be higher at March 31 or lower than this point?
Shah: Being an optimist and a fund manager I have no option but to say yes.

Damani: About you?
Ramachandran: I am going to caveat it with the famous cliché that forecasting is difficult particularly if it’s about the future. I think there is a reasonable chance that March 9 was a global low. I don’t think we are galloping off to new highs, but it seems very plausible that sort of sets the floor for both Anglo-Saxon markets but also for India.

India didn’t make a material new low in March. If it makes a slightly lower level than it got to in October. The reason I say this is that it was only four months ago. We were all anticipating not only skeletons in the closet, but different types of skeletons in the closet. So, we started with the sub-prime crises, the leverage credit crises, then went on to leverage private equity crises and so on. It just went bigger and bigger eventually encompassing something like a mark-to-market on almost a USD 100 trillion of total securities.

We are now out of that discussion and we are starting to discuss whether the different types of action will be sufficient to solve the problem, which to me suggest that we are past the half-way point. Now, we maybe going two steps back even from that midway point, but I think we are finally begin getting on to other side. In a financial market sense, it typically tends to need this. To me, it strikes me as a possibility that March 9 was the global low.

The consequence for a year from now, I do not think we gallop to new high. So, I do not think we can get back to it later, but I do not think equity market is the asset class of choice on a forward one year view even though it may have a positive return.

Damani: You have a view on 2010 - Sensex or Nifty?
Aziz: Probably much more comfortable talking about what might happen in the second half of this year than Q1 2010. My sense is that there is enough in the economy in terms of the policies undertaken in early part of this year and last December onwards to get us through a pretty decent economic turnaround in the second half of the year.

Laijawala: Currently, we have a Sensex target of 11,500 for next year. But I completely concur with Jehangir and say that I guess this target could pretty much change depending on the contours and the shape that the next government takes. Most importantly, how the next Finance Minister tackles the very difficult Budget. He will have to look at the arithmetic because there are some very significant challenges perhaps similar to what we saw in the mid-‘90s and 2001-2002. One of the biggest concerns that we have is of crowding out of the private sector and the trajectory that rates will take. So, markets will take direction from these events.

Damani: It has been almost an extraordinary bull market and bear market. I would like for each of the panelist to state one lesson that each of them has learnt in this which they apply not only to 2010 but for the rest of their lives one lesson whether learnt in the bull market or bear market or one great takeaway that you had from those five-years?

Shah: Never ask the barber whether you require a haircut or not. That’s the biggest lesson I have learnt. Don’t fall in love with the promoter. Never ask the promoter what is his estimation of the value of the company.

Ramachandran: There are unfortunately way too many lessons learnt in this episode of first down in 2000-01 and then all that transpired after that. I think the biggest lesson is that you stick with your conviction and you take the pain.

Kela: One clear lesson is what Shah said which is at least of us as fund managers have experienced – never fall in love with anything – forget a stock or a promoter except your wife. You have to really pay very a heavy price for being emotional in these markets. Second thing is that this is really a full time profession. One cannot take your eyes off the ball and think that I had done this and I had picked this stock. Three months is history in this market. If you take the eye off the ball and if you believe in your past that this is what I did in the past hence I should continue to be superstar, I think you’re history.

Aziz: Every asset bubble ends up in a recession. Every recession sows a seed for the next asset bubble. You just have to decide when to enter and where the asset bubble will be.

Laijawala: The key lesson is that the biggest problem with liquidity is that it is never there when you most need it.

Damani: There has been big debate going on of decoupling. Are we actually more coupled to global markets rather than decoupled as you were suggesting in India that the country was an island under the sun?

Ramchandran: India is decoupled. It is a question of semantics. Asia is decoupled, India and China have decoupled. It has not decoupled in a financial market sense on the way down clearly. Yes, we went down 60% in dollar terms when perhaps some of the Western markets went down 40-50%. So, clearly on a 15-month view starting in early part of last year we were not financially decoupled.

A second observation is we are growing miserably at I think 4%. Most people probably here think 5% but regardless we are still growing at 4% or 5% which in the old days would be the upper band of the rate of growth. This at a time in which Western economies, particularly the US economy on QoQ basis was growing negative 6%. So, you tell me if we are decoupled?

The last observation I will make is that on a five-year forward view do you think it is possible that a combination of Western markets, or let me just use the S&P as a proxy, is up 20% and India is up 100%. I submit to you the case that it is. So, I find a cyclical P&L recession country like India which typifies emerging markets are fundamentally decoupled from a supremely bust balance sheet system of the Anglo-Saxon world.

Damani: You watch global markets and you happen to be in India but you could probably sit anywhere in the world and manage money that you wanted to. If you were say 30 years old again and you have a choice of managing money anywhere in the world, where would you like to go and manage money?

Kela: Ideally speaking, I would like to manage money on a global canvas which is across different categories of investment and different countries because one thing which is very clear is that investments have no colour. If I had to buy a material company, I would love to buy it in Russia. If I have to buy a domestic driven demand company, I would have loved to buy it in India and may be some other sector in the US. So, I would rather than being predominantly from the place, one would like to have an environment where one is free to invest in any asset class which one wants to and in any country where it comes from.

Damani: Is there any particular region of the world? Any particular area that you think that over the next five years will give superior returns?
Kela: I think India, China, and Brazil definitely. I am too sure about Russia. May be my knowledge is pretty limited but I am confident about India, China, and Brazil.

Ramchandran: I am paradoxically doing the opposite having lived and spent most of my investing career outside of India, mostly by fluke. I returned to India at about the right time and I would not be anywhere else at this moment for pretty much the same reasons that Madhu just elaborated. We haven’t talked about this earlier, but I am not too sure about Russia either.

Damani: Is there a risk in that currency depreciation though?
Aziz: On currency depreciation, there will be event driven volatility. But if you go beyond the events, my sense is that the rupee is probably going to find support even if the USD 20 billion doesn’t come.
Damani: The range for the rupee?
Ramachandran: I have a wider range; I think 50-55 on the higher side and 47 on the lower side. I think it actually sells off first before the world famous USD 20 billion comes in but eventually it will rally and on a three year view I think it’s fantastic, it doesn’t matter whether you convert at 50-52 or 55. Buying the Indian stock market in dollar terms on a three year view is going to be fantastic return for both currency reasons and stock market reasons.

Damani: Let’s now move to gold- given what we have done with paper money, we have just produced endless supply of it with stocks, bonds they all become worthless overnight almost- do you think we will all central bankers move into gold- what is your call on gold?
Laijawala: That is an interesting question and the answer to that question will probably depend on how the world economy pans out and how we see the balance of power between China and the rest of the developing world. So it could honestly take any shape. It is very difficult to give a proper direction on that but yes, there will be a very strong bias towards gold and one the key reasons for that is going to be probably the increasing assertiveness of China.

Damani: Your opinion Madhu?
Kela: Essentially it’s a hedge in your portfolio but I don’t think it’s a 25-50% portion of your portfolio but maybe 5-10% and that essentially covers you towards whatever global risk is there. The only point I would like to add here is that it’s very much possible that in a bad economic environment, gold may set into a next bubble. Such a small amount of gold is produced annually in the world that even this ETFs on monthly basis by 128 tonnes, where gold prices go up by 15% in a month and there is so much fluctuation. So if it is anything of that kind which happens, it’s always wise to have portion of your portfolio allotted to gold.
Read More on Gold

Damani: Are commodity stocks ready to be invested, have they fallen enough- are you bullish on commodity resource based stocks?
Kela: Maybe the agricultural side of commodity stock might offer interesting opportunity from a medium to long-term perspective. Like coffee, tea, sugar because they have really fallen, and one can see that on a 2-3 year timeframe there could be opportunity not only in India but globally as well.

As I said you would like to look at the direction of the dollar before having a decisive view and I don’t think this commodity bear runs can get over in 6-9 months. When you look at cost of production and some of the prices which these commodities are trading at, for instance copper is trading at USD 4,200 per tonne, so I don’t think we have seen the bottom, in as early days as we are talking about. So maybe you will have trading bounces in these stocks so from a particular point they will become a buy but at a particular point they will become sell.

Damani: So commodity stocks are not a buy?
Kela: No, they are a buy. They have done phenomenally well; I am saying you will have to pay from point A to point B rather than paying for a cyclical downturn or a cyclical upturn.

Damani: Would you buy commodity stocks with a one year view?
Shah: I won’t be buying any stock with one year view. So commodity stocks don’t figure out over there. Again commodities per se are also going to see lot of events.

Damani: Your prediction for one year for oil? Oil is at USD 50 per barrel, you expect it to be higher or lower one year down the road?
Laijawala: USD 48 per barrel that is the Deutsche Bank outlook.

Aziz: In the USD 60 per barrel.

Kela: Between USD 40 to USD 60 per barrel.

Ramachandran: I would say in and around USD 40 per barrel.

Shah: I think on the higher side, about USD 50 per barrel plus.

Damani: If I could rephrase the question – what would be your five year view on oil?

Kela: Oil will be going much higher for a five year view

Damani: Does higher means back to USD 140 per barrel?

Kela: Don’t know.

Laijawala: I think one of the key reasons for oil at the levels we saw last year was the significant flow of funds that went into the commodities. It is very difficult to expect the same sort of deluge of funds into different commodities

Aziz: We need serious reflation of the world economy for all commodities and you can see things happen here there but for serious reflation, I am not so sure we will be in a situation where inflation 5 years from now is going to be really strong.

Ramchandran: Higher but nowhere near USD 140 per barrel.

Shah: Much higher than USD 50 per barrel.

Damani: You made a brilliant call on real estate the last time we were on a panel together. Let us talk urban, non-urban outlook over one-year?

Kela: One-year outlook looks challenging clearly. Again, a lot of this may have been priced into real estate stocks, some of which a fellow may be really tracking at 0.3-0.4 times real book value. First, it may be great time to pick stock from a longer-term perspective. I don’t know what is going to happen in 2009-10. Second, I think there will change in the players. A lot of the players who have gone overly risked in the last boom, they may not see the next boom as vigorously as they saw. There will be new leaders. Third, don’t forget real estate sector is a very large sector. So, in any bull run it cannot be ignored in that sense. If you really believe in the India story, then may be stock specific it is good time to buy real estate.

Ramchandran: The question has to be very carefully phrased. Real estate as a broad economic sector is in the morass for two-years or probably longer. But secondary market real estate is already reflecting that in pretty serious terms. It is possible that on a three-year view now is not a bad time to enter. So, you have to be very careful how you structure your investment, but straight buying of stocks or buying of selected stocks in the real estate is a good idea.

Aziz: I am the wrong person to ask this question, but my guess is that depends entirely on a firm to firm basis. What kind of debt restructuring etc different firms are doing? The macro economic trend is that the business cost in India has to ratchet down to a reality of 4-5% growth from what it has been used to i.e. 9% growth rate. Real estate rental prices and real interest rates coming down are the two key things that haven’t come down as yet. We have seen commodity prices, input prices go down. Wages are very sticky and you don’t really want wages to go down.

If the anecdotal evidence or the news reports of 20-30% declines are true and are pervasive, then we are going in that direction but both of them need to come down for the new reality of a 4-5% economy.

Kela: Seeing the various ads by various paper companies, they suggest that both sales are happening and the prices are not down not 20-30%. They might be down as high as 50% from their peak prices.

Read: Real Estate Sector Still In Downtrend

Laijawala: We still need to see more weakness before we get more positive on the sector.

Checkout: Stock Market in 2009 - Stocks to Buy
Source: MoneyControl

1 comment:

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