MARKETS MAKE INVESTORS LOOSE HOPE AND MONEY

[Dr. Sanjiv Agarwal]

Investors who have their investments in capital market are at a loss now a days facing uncertainty on the market behaviour, while the country is in festive mood. Investors with exposure in stocks through primary market IPOs and stock market investments, mutual fund units and other market related products are facing difficult times as the market is in free fall mood.

BSE sensex is now ruling around 15000 which is over 25 percent lower than what it used to be few months back. Many of the new primary market floats are quoting below their offer price, thus giving negative returns to investors implying that IPO offer was highly priced which could not sustain the market pressure and volatility. In fact, their price behaviour has been erratic. Fearing the lack of support from the investors, about Rs. 10000 crores worth of public offers having SEBI clearance are likely to be deferred or withdrawn, given the ongoing market uncertainty and volatility, despite the fact that promoters have always preferred to launch their IPOs during festive time as it is considered auspicious. These probable IPOs were from both – private and public sector and include companies such as ONGC, SAIL, IOT Infrastructure & Energy, Greatship (India), AGS Transact Techno, Sumatex, Lawasa Corp., Hindustan Copper etc. In many companies, SEBI approval will lapse if issue is postponed as the markets are not conducive for IPOs.

It is not onlyIndiabut a global trend. Recently Siemens AG, ADS Tactical, XiaoNanetc. have also postponed their offerings in foreign market. In US, there in a biggest backlog of IPOs since at least 2006 with 155 deals as at September end. Issuers have learnt to be more patient and are now scouting for alternative sources such as private equity, debt instruments, strategic mergers and so on.

This week’s downfall in market is again attributed to negative perception created by sensitive credit rating update on State Bank ofIndiafrom Moody. The stock market inIndiais now a days geographically and politically sensitive and as such stock indices fall in sync with related developments. When moody downgraded the rating of SBI from (C-) to (D+) on the basis of capital situation and asset quality, Indian market reacted sharply.

In case of two other Indian banks – ICICI Bank and Axis Bank, ratings have been retained by Moody’s and Fitch (C-). While ‘D’ rating suggests modest intrinsic financial strength, potentially requiring some outside support at times, ‘C’ rating denotes adequate intrinsic financial strength.

However, there is nothing to worry as other leading banks too have (D+) rating nor it is something abnormal as our banking sector is hit too by global financial and banking risk as all countries and economies in the world are closely interlinked. This downgrade could be a short term phenomena and only a consistent bad rating is alarming. Such ratings would impact the individual stocks and it may have a short-term impact on market too.

With range bound movement seen in stock market with negative bias, is it wise to invest in stocks now? For investors with risk appetite, yes, one can take a chance as a number of fundamentally strong scrips are quoting below 25-35 percent of their last year’s quote. The loss in market value is disproportionate to the risk perception or economic slow down, yet the fundamentals being reasonably goods. In some stocks, current year’s performance is good yet prices are down. One needs to identify and pick up such stocks. It could be wise in terms of trying to beat inflation over a long period. One should continue to capitalise on investment opportunities form time to time.

For risk averse investors, with gold and silver too being under pressure, it could well be a good idea to sit on cash and earn 10-12 percent interest and invest in good investment products once short term crises is over and overall clarity emerges. All said and done, the road ahead seams to be bumpy and all markets appear to be choppy on a short term horizon.

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Discussions to this article

[DEV KUMAR KOTHARI]

As discused in some earlier articles and discussions on some articles, it is proven fact that one has to keep his investments well diversified. While interest earning assets shows apparently good return, but in reality there may not be return at all if there is high inflation. Recently I was reviewing a computation of income, in which client had satisfaction of good return in  certain  long-term debt funds invested in Templeton MF during May 2009 and . The holdign period was more than one years- about 13-14 months. There was profit as per books of Rs.5.67 lakh   on original investment of  57.32 lakh thus the apparent return was less than  10%, client was happy assuming it good return. When Cost Inflation Index s was applied the resut was loss of 1.47 lakh. This is on consideration of inflation only to the extent of 75%, (considered in CII by governemtn)  if real inflation be applied then the loss is 1.96 lakh. thus there is no real return on investment. In fact there is erosion of capital by  more than 3 percent of investment in abut 13 months.

However, for liquidity for regular and contingent expenses  we also need to have  easilable encashable  funds also- this provide opportuniteis to banks and other borrowers to borrow funds at low rate of interest.

Therefore, it is necessary to invest in a diversified manner. For small invsestors  and also during early working life also small investmentc are possible and desirable  in gold and silver- jewellery,  Gold units, small  landed properties,  diversified equity, debt instruments, fixed deposits with banks and companies etc. A mix of borrowings repayable in easy instalments is also desirable to provide a hedge against inflation - the loan is fixed but the property acquired may appreciate.

It is really difficult to plan and derive a desired result by way of real return on investments.

Considering 35 - 45  years of working life one should consider the inflationary impact  to plan retired life. For example  A CA used to earn initial salary  + perks of about Rs.1500/- per month in 1975 now nearing retirement  he need to pay  more than five times of this to his driver and more than ten times to his PA.

[DEV KUMAR KOTHARI]

As discused in some earlier articles and discussions on some articles, it is proven fact that one has to keep his investments well diversified. While interest earning assets shows apparently good return, but in reality there may not be return at all if there is high inflation. Recently I was reviewing a computation of income, in which client had satisfaction of good return in  certain  long-term debt funds invested in Templeton MF during May 2009 and . The holdign period was more than one years- about 13-14 months. There was profit as per books of Rs.5.67 lakh   on original investment of  57.32 lakh thus the apparent return was less than  10%, client was happy assuming it good return. When Cost Inflation Index s was applied the resut was loss of 1.47 lakh. This is on consideration of inflation only to the extent of 75%, (considered in CII by governemtn)  if real inflation be applied then the loss is 1.96 lakh. thus there is no real return on investment. In fact there is erosion of capital by  more than 3 percent of investment in abut 13 months.

However, for liquidity for regular and contingent expenses  we also need to have  easilable encashable  funds also- this provide opportuniteis to banks and other borrowers to borrow funds at low rate of interest.

Therefore, it is necessary to invest in a diversified manner. For small invsestors  and also during early working life also small investmentc are possible and desirable  in gold and silver- jewellery,  Gold units, small  landed properties,  diversified equity, debt instruments, fixed deposits with banks and companies etc. A mix of borrowings repayable in easy instalments is also desirable to provide a hedge against inflation - the loan is fixed but the property acquired may appreciate.

It is really difficult to plan and derive a desired result by way of real return on investments.

Considering 35 - 45  years of working life one should consider the inflationary impact  to plan retired life. For example  A CA used to earn initial salary  + perks of about Rs.1500/- per month in 1975 now nearing retirement  he need to pay  more than five times of this to his driver and more than ten times to his PA.