Sunday, July 13, 2008

Investing Cycles!

Can't trade, its volatile.
Don't know where it is headed in the short term, but long term is good.
Shouldn't miss the next bull run.
Markets would go up surely in 2 to 3 years.
Best time time buy. Look at stocks, some are down 70%.

These are some of the latest market tantrums. If anybody doesn't want to miss the next bull run, then why isn't the market turning around? Though I am not going to try and explain these facts, but can sure look at past and evaluate what can be in store for us.

The Indian equity markets are one of the most volatile markets from a traders perspective. The percentage changes over a period of month or for years can be quite dramatic. So investing at the right time is an important aspect for everyone.

Most of the people who are not professional investors or traders invest when there is buzz around and buying stocks becomes a fashion. The systematic investment plan or sip is regarded as the holy grail of investing. It is a nice idea for someone who is new to investing but in reality it doesn't serve the purpose it is meant for.

Equity markets tend to move upwards in growing economic scenario for a longer period of time than downwards. For instance the Indian markets have been in uptrend for years since 2001 with periodic downturns lasting for a few months. Now a person who is investing into the equity markets with a sip would have a higher probability of seeing better returns if he invests for a longer period as the probability of market being above the 'average' is higher. SIP per se is not bad. But it is not for people who track the markets or at least invest rationally. Surely it is an easy way to avoid the noise and build better returns than other forms of investment.

Is there a better time to invest in these schemes?
Yes there is surely. I don't like postmortem of the markets, but analysis never harmed anyone. If we make a plan and invest by sticking to it, we can better the odds. We can follow a simple plan to invest our hard earned money into the markets. Lets see what options do we have now.

Firstly look at the real returns. Whether it is wise to consume or save. Currently there is little incentive to invest as inflation is too high. In the present scenario it is better to invest part in equity and a part in debt. Commodities are not an asset class and never will be. Commodities are not meant for investing, they are meant for trading. The best way forward is to invest in a liquid fund and switch all your money in debt to a fixed deposit when RBI raises rates above 10% and FD rates go up. A better way to time the markets is to look at the big corporate houses and look for lean period of demand for loans. That is the time to switch your debt component to FD and lock in a better rate. The corporate debt market is still active and there is still demand for loans. We are no at the top.

Another important point is not to borrow at these interest rates and repay all your outstanding loans. It would be better to pay off the loans now as the value of money is lower with higher inflation. That is what I mean when is say consume or invest.

The other component is the equity markets. It is important to own some equity always if one is not a professional investor or trader. Though Mutual Funds is an easy way of investing as you get some managers for your money. The other way is to build your own portfolio of stocks. The equity markets have a typical cycle which runs in tandem with the economic cycle, but with a lead.

We saw huge run in energy stocks. They peaked off and fell dramatically. We saw huge surge in health care, pharma. Now with these firms well off their peak, it is time to look at utilities. There are very few utility companies to invest into currently but few of them are available. As I wrote previously the better sector for present scenario are energy, IT and FMCG, we can look at specific bets in these sectors. RPL would serve better in energy, Infosys in IT, and ITC in FMCG. Since all these stocks have market beta so they would also correct with the broader market, but they have value to be bought into. In utilities, one should keep an eye on Tata power and Reliance infrastructure. There are other firms which are great buy at current prices such as Mundra Port & SEZ e.t.c.

Since most of the investor like to invest into equiyt markets through mutual funds, it is better to look at funds with allocation to sectors which can serve the purpose of wealth preservation. Since MFs are expected to change to better sector it would serve the purpose of timing as well. Still one should look towards funds having exposure to large cap and consumers (non-cyclical).

Most of the investors who look at markets and frown when they fall are missing out important opportunities. Since economic cycles are periodical, slowdowns and recessions should be accepted as a market phenomenon. There is an important shift in demographics which would result in higher economic growth in the long run. Market downturns gives us to cherry pick the sectors which we expect to perform better. By investing in particular sectors at particular time, we better our odds in the long run. Even the great investors like Peter Lynch and Warren Buffett buy things at the right price but at the right 'Time'.

Current market scenario looks quite gloomy and there is little investor interest. I think this is the right time to invest through systematic investment plans until inflation peaks off and then investing larger parts directly into the markets.

As far as the markets are concerned I expect there would be a period of weakness for some more time. But as a rule, I try to be less bearish as the markets falls and less bullish as the market rises. It leads to more objectivity. There is an old market saying - 'Intelligent investors are always running scared'

The greed is not out. Unless old money vanishes, new bull markets don't strengthen.

Sahil Kapoor
Comments are welcome.

No comments:

Post a Comment