Will 2009 be the same?


Recession, slow down, pessimism about the Indian economy (of course because of the recession in the U.S. economy) are words that become common place in local lingo!

Everybody and his aunty is now convinced that the Sensex will touch 5000 very soon, and the last place to be investing now is the equity markets. Of course many of these people were sure that the equity markets will touch 25000 – just about 12 months back.

Times are tough. People who had Rs. 20 lakhs as salary and Rs. 55 lakhs bonus, however forgot that the bonus may disappear. Now the bonus has disappeared (luckily the job may still be there) but the EMI refuses to go away! Similarly the friendly agent who said that Unit Linked Insurance policy is a 3 year plan NOW tells you that there is some more premium to be paid! Forget vanishing premium, the policy seems to be vanishing!

Too many investment myths have gone unchallenged lately. And we love to believe that tomorrow will be like today. So the best thing to do is relax, and read the classics. This feeling is a little funny – today was just not like yesterday!

Let’s begin by examining the four biggest investment myths circulating right now:

Myth #1: The Market will recover in 3 months time

In case your broker, banker, relationship manager, – anybody whose job is dependent on the size of your cheque tells you that the market will recover in 3 months. He / She is praying loud. Like God, you can either listen to it, or ignore it.

Democracies, Free Markets, are the way to go. Even the Chinese believe in that! So the markets will do well – after all the index is a slave of earnings and optimism (price-earning ratio!). However, nobody can put a time line to it. That is tough.

Myth #2: Indian Growth Rate is poor!

The reality is India will continue to grow at a decent rate – 6.5% – is a FANTASTIC growth rate. All the strength of the English speaking population, BPO, KPO, software, exports are all in place. The strengthening of the US $ is a boon, the falling prices of oil is a boon, the falling wages is a boon for the manufacturing and software sectors – so just chill.

Three years ago, most of us would have given an arm and a leg for 6% growth. You need to remember that the US has a strong ability to innovate and grow. India will continue to be an important partner for the US, and we are not in a gloom only scenario. Our balance sheets are not over-leveraged (the equity markets will punish the excesses – look at Cholamandalam DBS – the share has fallen from Rs. 370 to the current price of Rs. 40!) – which means our recovery will be faster than the US economy.

Myth #3: The FII money will not come back!

The strengthening of the US dollar is surely going to make Emerging Markets as a class less attractive. However, if you believe that the US cannot go on converting all their coniferous trees into green backs, the US dollar will weaken. Thus at some stage when our earnings move up, and the markets look attractive, the monies will come back.

The flip side is there are many people who believe that the lag in the FII investment will be taken up by the mutual funds and the unit linked plan collections. This looks good in theory, however in real life it may be difficult. As downsizing happens, the first casualty will be the mutual fund SIPs and the Life insurance premium. This is a major cause of worry – as the BFSI sector is also a big employer. My take on this is very hazy.

Myth #4: Real estate and equity markets will take decades to recover!

In the more than 200-year history of equity investing in the United States, stocks have never taken decades to recover. I used the US example because Indian stock market history is not long enough. However, if there was an index fund available since 1978 (sensex base year), done a SIP, and re-invested the dividends, I dare say you would have got a great return (say 5% real return) over 30 long years. Add compounding to it, and you would be a rich person! Remember, you would have out performed your bank fixed deposit partner by a mile. (The key is regular investment and reinvested dividends, and a low asset management fee.)

The Nikkei 225 in Japan, is down more than 65% from its peak in 1989. Could India be headed for the same long, deflationary spiral? Not likely. The Japanese real estate and equity bubble was much bigger, government action there was clumsy and ineffective, and the banks were knee deep in shit. Indian economy is still growing.

In India the real estate mess is in the capital market – so risk transfer is quick, brutal and immediate. Real estate companies have fallen between 30 – 80% from their peaks.

Also remember the market normally does things in advance – so the battering may have happened AHEAD of the real market events. So if real estate prices were to fall (say 30%) the shares of real estate may actually go up! Logic being “Oh! After all the markets have fallen ‘only’ 30%, we had expected 80%”.

So, let’s buck the trend together – and look forward to a happy, healthy and prosperous New Year!

Happy 2009, and happy investing

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One Response to “Will 2009 be the same?”

  1. Thanks for sharing the information. Hope 2009 would bring enough changes in the stock market.

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