What’s in store for the markets this week?

Short term predictions of the markets are always fraught with danger as they can end up making you look rather silly. It is much more hazardous to try and do this for the immediate term like a week. However, investors who are into stocks seriously will recognize the value of understanding short term market movements and I thought I would take a shot at it for this week.

Since the upheavals of last Monday, the market seems to have some semblance of stability, both globally and in India. The factors in the global markets that will be most watched for in September are the Fed rates in the US on September 17th and the ongoing China story that is unfolding. If the interest rates are hiked and Chinese market continues to slide then it is quite likely that there can be short term panic. As our markets are largely dependent on FII investments, any large scale sell-off from their end can easily get our markets to crash. On the other hand, if the two events do not take place then there will be a lot of relief among global investors and, while this still will not be enough for a strong rally, global and Indian markets will be able to be in a range with a possible positive bias.

The domestic factors faced by our markets are more challenging at present. The following are worth considering:-

  • Earning for the last quarter was with mixed messaging and will not play a role in driving markets up. Even this quarter seems muted and all real hopes are pinned on the last 2 quarters of the FY.
  • Irrespective of the political spin that the Government wants to put on it, the backtracking on the land bill amendments is a huge negative, both as a signal and in real terms. The pace of infrastructure build-up is going to get adversely impacted by this, leading to much longer recovery in the stock prices of companies linked to such activities.
  • For all interest rate sensitive sectors, the wait for the rate cuts continue. However, the RBI Governor has not held out much promise on this front and my estimate is we will have a maximum of another 25 basis point cut this year and maybe 50 basis point cut in the FY. This will cause cheer for many stocks but it is still some time away.
  • Political situation is uncertain and chances of GST being passed and implemented by April 2016 is doubtful. Though this is more of a sentiment issue, the lack of progress is negative for the markets.

My assessment from a fundamental perspective is that there are possibilities for the markets to either move up slightly or have a more considerable down-move in this week. For the Nifty, the downside will probably be capped at 7700 or so, where it is likely to find support. On the upside 8200 will be difficult to cross. We will most likely see both days of strong gains and serious losses in the coming 5 days. I expect Nifty to end between 7900 and 8100 on Friday.

The mid-cap and the small-cap indices will have more pronounced movements and in all likelihood the bias there will be negative. Individual stocks may fluctuate rapidly based on news flows but most will trade in a range.

If you are into stocks then what should you be doing? For your existing portfolio, where you already have price triggers for buying, look at these carefully but continue with your plan. For new investors trying to start a portfolio, stay on the sidelines for now. There will be better times to buy, the volatility this week and possibly the next month is not a good starting point.

I plan to do a post at the start of every week, covering this topic and hope it will be useful for the readers.

I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

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A compilation of all my guides

Over the past 2 months and a bit, I have published several posts in the blog that have pretty much covered most aspects of personal finance and goal based investments. As new readers keep visiting the blog, I get inundated by the same queries which have already been answered in the earlier posts. I thought it will be a good idea to point all readers to the guides that I have published over this time. You can read these to gain a complete understanding of most investment issues.

The following are the guides that you will find to be the most useful:-

As you know I had started a series on how to build your own stock portfolio from scratch. Over the next week, I will get into specifics of the sectors and companies that you can look at investing.

I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

The long and short of equity investing

All of us know that equity investment is for the long term, right? As an overall philosophical postulate I find nothing wrong with that statement. The issue is when we try to apply it rigidly without understanding the implications.

First things first – what really is long term? For a person starting his/her investments at 25, long term can easily be seen as 25 years or more. For another person who is 40, long term would probably not be more than 15 years. In general though, most people would agree that a time frame of 15 years or more can be safely taken as long term. Now, if we are saying that equity investments are for the long term, then does it follow that you should not invest in equity if your time horizon is less?

Let us take a little closer look at the actual stock market returns over the last 15 years to understand this better. The following observations will be of interest:-

  • Any rolling period of 5 years or more has never given negative returns. The number of such periods is 11.
  • For the 13 rolling return observations of 3 years or more, only 2 have given negative returns.
  • Average return over 5 year periods is the highest at 17%, for higher periods it ranges between 13 and 16%.
  • Maximum return is the highest for 1 year period at 51% and lowest over 15 year period at 13%.
  • Standard deviation is 0 at 15 years and 24 at 1 year.

How do we interpret these observations? Well, for one it does demonstrate what I have said in several of my posts. Returns from equity are non-linear in nature and hence not really time dependent. You may well get great returns in 2 years and fairly mediocre returns over 5 years. Yes, with longer term the risk does reduce as shown by the standard deviation. But even from this data of last 15 years, it is easy to see that investing in equity can be worthwhile for the shorter time frames too.

So how should you really invest in equity. I have discussed in detail about the 3 portfolio model in my earlier posts, interested readers should make an effort to search for the posts in my blog. But here is what you should essentially do:-

  • Decide on your asset allocation between debt and equity. For the most part, debt can be taken care of through your PF and PPF only, no need to complicate it further.
  • Invest in MF so as to cover all your goals. Retirement will be partly funded by debt investments in PF and PPF.
  • All other amounts you can invest should be put in stocks.
  • Make sure that you do not have to sell from your MF or stocks portfolio in bad times for the market. Your PPF account balance should therefore cover all immediate goals. If the account balance is not adequate add other debt products.

This is all that you need to really do – there is no need to worry about the long term or short term for investing. When there is need for money, you can decide on redemption strategy based on how your 3 portfolios are doing. You just need to maintain your overall asset allocation and just keep investing regularly.

I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

Mandatory reading before you invest in stocks

As you know I have recently started a series of posts on how an investor can go about building his/her own stock portfolio. I had already written a few and was just getting into the choice of sectors and specific companies in them, when the mayhem happened in the markets last week. That kind of forced me to address other aspects of market crash etc, but I will get back to the series next week. However, many people have written to me asking what stocks they should invest in. While that makes me happy, I think there is a lot of resources in the blog they need to read up before they take the plunge.

For starters definitely read the following posts before you go ahead and start creating your own portfolio. Of course, this knowledge will be useful to people who are having their own stock portfolios but want to make it better. Each of these posts have several links to other posts, so make sure that you read all of them.

Having read all these posts you now have the required knowledge to get started on buying stocks for your portfolio. I will be getting back to the disrupted series next week. Always remember, equity investing is a journey which you must prepare for – at the same time you cannot get started unless you show some initiative. You need to get started, even if it is in a small way.

I am happy to see many people have got started out here. Also, become a part of my Facebook group Market Musings where a lot more is discussed on the general market situation and also individual stocks.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

How I plan to invest in next 1 year

The recent market fluctuations and more importantly, the uncertain global situation have got me thinking a lot on how I should treat my investments over next year. Till August, I was reasonably happy with where I had reached in my investment portfolio. My passive income stream was taking care of all my expenses, I had separate allocation for children’s education and my active income was all available for investment. My idea was to keep investing in PPF and MF SIP over the next 8 years or so, when I could join the ranks of retired people.

However, some changes have been necessitated in my earlier thinking due to the following reasons:-

  • My passive income stream was dependent on dividend from stocks and MF to the extent of 30 %. This can get reduced significantly if the markets do not recover well in the next year or so.
  • The rest of my passive income stream is from rental income, interest from tax-free bonds and capital gains from FMP. These will not be affected by the gyrations of the markets.
  • Though I plan to keep investing in MF over next year, I am now clear that markets will both zoom and plummet in this period. SIP mode of investment is therefore not a right way going forward.
  • There will be several windows of opportunity to add to my stock portfolio during the next one year. I need to look at this actively by bringing in whatever resources are possible.
  • Interest rate cuts will now definitely happen, so investments in FMP etc are less attractive.

In practical terms, these are the actions I am contemplating to execute shortly:-

  • Focus more  on generating active income to counter the reduced dividend as well as to have more resources for investing in the stock portfolio. So far, I was only looking at assignments that genuinely excited me. For some time one may need to be somewhat more pragmatic.
  • Currently I have SIP in 7 funds which are all for a 2 year period. Read about my portfolio here if you are interested. Most of these will be done by October. I plan to reduce my investments to 5 of these after that. I will also make one time investments in periodic manner as I have a feeling that timing the market will be rewarding in the next year.
  • When some of my FMP mature, I will use the principal amount to make the above one time purchases in MF.
  • Any surplus from my active income (most of it will be), is to be used for investing in stocks. I will mainly be adding to my existing portfolio but there can be some selective additions too.

I see this as a really good opportunity to focus more on the market actively and building up my portfolio further. My strong conviction is that we are in the midst of a secular bull run and investments made in the next one year will have a significant bearing on the long term growth potential of any stock portfolio. My own portfolio had benefited immensely when I took a contrary position in 2008 and 2009, by adding significantly to existing stocks.

While I do not recommend you follow anyone’s investment approach blindly, I will say that the next year will be a good time to add to your portfolio if you are already having one or to start one actively if you are not.

You may want to read the posts I was doing on building a stock portfolio, before I got distracted by the excitement in the markets !! I will try to continue them next week.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

Making sense of the markets – my perspective

I have been asked by several people over the last few days as to what are my impressions of the market and whether one can make some sense out of the mayhem that seems to engulf all markets globally. In the present circumstances it is not an easy thing to do but I will take a crack at it as I believe that just saying, “anything can happen in the market”, is really said by all fence sitters who are unable to understand what is going on. I will try to explain things in as simple a manner as possible, for more complex arguments and data, you have access to multiple sources.

In terms of the global scenario it is not too difficult to see what is going on. The following are of note:-

  • The world growth was critically dependent on the Chinese economy and that has been compromised greatly.
  • US and Japan are actually doing better, compared to the last few years, but their impact is not yet significant.
  • Europe has had problems, specifically with Greece defaults and subdued demand.
  • Among the BRIC nations only India was showing promise but they had their own set of unique issues.
  • Devaluation of the Chinese currency is an indicator of the pressure their economy is under currently. This has affected commodity prices adversely and may well result in large scale flight of capital from China.
  • There is an expectation that US Fed may hike interest rates on September 17th. This will signal an end to easy money availability from an official angle.
  • Stock markets are largely determined by FII investments and they will continue to shift money from one market to another in these uncertain situation. One can expect volatility in all markets due to this context.
  • A look at all markets will show that India is in a relatively better state as compared to other major players.

Specific to India, the following aspects need to be understood in order to make sense of the market movements:-

  • The markets had run up in 2014 and early 2015 with an expectation of major government policy announcements as well as better earning expectation from companies.
  • The legislative imbroglio in parliament has put serious questions on how fast things can change on the ground, even though a lot of positive executive actions have been completed by the government.
  • Earning of companies have shown some first indications of improvement in the last quarter, but it will probably take the rest of this Financial year to become definitive.
  • Availability of capital is still an issue with the rate cuts not having happened as expected.
  • Valuations of some companies have become expensive and many investors are deterred by these today.
  • The Rupee situation is a problem and it is possible that Rupee will stabilize around 65 levels rather than 60 now. This will be a challenge for imports, especially for manufacturing related industries.
  • Positive things in the economy today are as follows: A government with positive intent, transparent operation of auctioning national resources, good management of economy on CAD and Fiscal deficit front, possibility of things happening on black money area, lowering of inflation to realistic levels etc.

With all of the above being understood, where can we say our markets are going in the near and medium term future? While it is always hazardous to predict market levels, I think the following situation will play out largely.

  • Indian markets are still in the middle of a structural bull run. It will be important to remember that bull runs have several sharp corrections on their part. In the near term it is possible that we are going to see near 7000 levels of the Nifty. I do not think it will go below that, in fact my bet will be towards a support level of 7500.
  • Over this FY my expectation is that the Nifty will strengthen to a level beyond 8500 and will possibly be at 9000 levels by March 2016. The bias on the Nifty is thus quite positive still.
  • Improved earning over the next 2 quarters will open the floodgates for FII investments and can accelerate the process of recovery in our markets.
  • If the 9000 levels are achieved in March 2016 or before, the bull run would have resumed in a definite manner.
  • Over the next 2-3 years it will be possible for the Nifty to reach levels of 12000 or so. However, this will be interspersed with sharp drops and 7000 – 8000 levels will also be there a few times.

What should one do as an investor in these times and in the future? Well, for the main it must be “business as usual” strategy. Continue your investments and if you are investing for the long term look at possible increases. Do not focus on the day to day roller coaster ride of your portfolio values, they are important only when you want to sell. At the same time, avoid all temptation to over leverage yourself to invest in equity.

In the next post, I will write about how I am going to handle my investments from the next quarter onward.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.

Market crashes and how the 3 portfolio strategy works

I am sure most investors are shell shocked by the turn of events yesterday. For me, even with my earlier experiences of 2008 and so on, the fall has been pretty brutal to say the least. My combined equity portfolio in stocks and MF got whacked down by about 6 % in a single day, not to speak of the cuts of the last week that it had witnessed. The point brought home rather forcefully is this – it is one thing to understand the nature of equity returns, quite another to experience it in real life.

However, the good part in all this is that the crash was not the first of it’s kind and in all previous instances the markets had stabilized in the medium term. This time, the global factors and the domestic situation in India are both against a quick pull back in the markets. I can foresee a lot more pain in the markets over the next few days and the earliest signs of some turnaround for us may well be linked with the quarterly results of Q2. As far as your investments go, it will be a good idea to deal with them as outlined in my blog post of yesterday.

As I have said before, such times of tribulation are a good instance for checking out whether your overall investment and asset allocation strategies are designed to weather the storm. If you are following the 3 portfolio strategy of debt, MF and stock portfolios then here is how you are affected and also some pointers as to how you need to deal with the context:-

  • Your stock and MF portfolio will undergo serious cuts, more so than what you have witnessed so far. It is quite possible that by the time the pain is through these can reduce in value by 20-25 %.
  • More importantly, you will suddenly see your SIP amounts of the last 2 years or so starting to show much less returns, some of these will be in the negative territory.
  • As a lot of the portfolio value of MF was really dependent on 2014 rise in the markets, the current crash will have a severe effect on overall XIRR. It will definitely fall to single digits if this continues.
  • Continue your SIP and add more MF units manually from time to time. You will find it difficult to predict market bottom, but considering the long term growth potential, every 5 % cut is a good investment opportunity.
  • For your stock portfolio make selective purchases in stocks you want to have in your portfolio. As always, do not put a big sum of money at one go, use price triggers and ensure your unit costs are coming down.
  • If you are not comfortable to buy into equity now, park your surplus money in Liquid funds for later use.
  • For those who are working and have an active income, some specific pointers are as follows:-
    • Continue investments as before, stopping SIP will really be a bad idea at this time.
    • Build up your cash reserve if you believe there will be better buying opportunities round the corner.
    • Your equity portfolio is for your long term goals – in that case do not worry at all.
    • If any of your goals were coming up shortly and your plan was to redeem part of equity portfolio then you need to change your plan. This is the wrong time to sell equity, look at getting the needed money from debt.
  • For people in the FI state like me, some of the specific pointers will be as below:-
    • Check how much of your passive income stream was dependent on equity. For example, in my case the income from dividends in stocks and MF amounted to about 30 % of my annual needs.
    • Understand that contribution from equity towards passive income will reduce in this and possibly next year. You need to have alternate sources now.
    • One way can be to look at generating some active income through what you do. In my case, I will be putting more efforts into getting Consulting assignments now and over the next 1 year.
    • If you had a goal which was depending on equity redemption, you may need to check the feasibility of postponing the goal. Your debt portfolio will need to generate passive income and it may not be a good idea to leverage it for your current goals, unless absolutely essential.
  • For people in retirement, most of the above will apply, except for generation of active income part.

People not familiar with the 3 portfolio strategy can read about it here. If you are interested in building up these 3 portfolios for your own investments read this post. The fundamental concept is that your equity portfolios have been grievously injured now and may well sustain further damage in the near future. The only real way to help it recover is to give it time. In time, markets will recover at least in India we can be reasonably assured of future growth. How much time it will take, none of us can really foretell.

Till then you need to be conservative with where you put your money and also a little ambitious in seeing if putting some money into equity makes sense.

Interested readers may pls follow my blog on email by clicking on the relevant button on the right hand panel. I will shortly be stopping the practice of posting the links in different Facebook groups. Following the blog will ensure you get intimated whenever there is a new post.