Tips for Investing in 2008

2006 was the year when the Sensex conquered many milestones in its upward journey but not without a major fall in May 2006. 2007 was yet another fabulous year with the Sensex scaling newer peaks right from 14000 to 20000. What is more surprising is that the stellar returns of 40% plus came on the back of high base. Besides the Sensex’s upswing, there were several other things that became the talk of the nation with some of them directly or indirectly causing the Sensex to swing in either directions and thus providing entertainment to the general public.

• FII Inflows & Pullouts
• Dollar Depreciation
• Interest Rate Hikes
• Subprime Crises
• Political Mood Swings in light of Nuke Deal
• Curb on Participatory Notes

No one - right from fund managers, brokers, India bulls or bears could in their wildest dreams ever think of Sensex scaling up 20000. There were various year-end targets of around 16000-16500 set by big foreign brokerage houses with access to so called research. But what happened in the end? The verdict loud and clear is on the wall.

Even as the Sensex scaled up new highs, investors got jittery and started taking exits from the market at 15000, 15500, and 16000 and so on levels, though for investors who exited at 19500 levels there was a re-entry window of four days caused by the P-Note fiasco. However, when the markets started falling, gloom doom gurus were back in action predicting even lower levels. It really takes a lot of guts to invest at such times. What happened in the end is that you missed the opportunity and the Sensex zoomed back again to 20000 levels. “Market timing is not just difficult but impossible” – this is the message markets have once again taught us.

A lot of people would be asking themselves “How could I do this”? The worst affected of all are the skeptics who have consistently shown pessimism towards Indian equity and stayed out throughout. NRIs (especially the dollar heavy ones) who invested in Indian equities made a killing because of the double gift of equity and rupee appreciation.

So what does 2008 have in store for investors and non-investors?

1. 25000 is the next number that will excite the market. Every 1000-point move from these levels is just a 4-5% appreciation and 25% appreciation from these levels takes the Sensex upto 25000. Will the Sensex breach these levels? I could easily answer this question in December 2008 but right now there is no way for me to make any predictions and stick my neck out on this. Being an India bull there are reasons such as strong corporate earnings growth (though slower around 20%), and liquidity expected from FIIS & domestic institutions that could propel the Sensex to 24000 by the end of the year (Sensex PE at this level would be around 22.85 considering Sensex EPS of 1050).
2. The first 3 new months from January to March would see several insurance products being launched. These are the months when majority of the people make their tax saving investments and hence one would see a plethora of insurance products and ELSS (Equity Linked Savings Schemes) being launched.
3. 2008 will be the year, which might break all records in terms of mutual fund launches with as many as 80-90 schemes to be launched. Though mutual funds seem to have run out of ideas, it is not uncommon to see them launch me-too schemes. Additionally several new Asset Management companies who have got their licenses will roll out schemes. There might be fund manager churns and it would help taking a look at the new fund manager and his strategy going forward for managing the scheme.
4. The dollar could continue its southward journey but the RBI will make all efforts to arrest its fall. The dollar would not fall sharply but a minor 3% correction cannot be ruled out. Currency reserves ballooned this year by more than 80 billion dollars to 260 billion dollars.
5. Interest rates seem to have peaked out and there could be possible interest rate cuts. HDFC has already given an indication on this front and it could reduce interest rates by around 50 bps. Inflation is also under control and is a good sign. However surging oil prices could take inflation higher and keep interest rates firm.
6. Earnings growth will be more subdued in the range of 18-20% (which is still good by any means) and Infrastructure, Banking, Financial Services and Entertainment will be sectors to watch. Additionally Technology, which was one of the worst performers in 2007, might make a comeback along with telecom.
7. Subprime may claim more wickets in 2008 and this could once again exert a pressure on sentiment and liquidity in that order. However the Fed might again cut interest rates and infuse more blood (read: capital) in the system.
8. With elections in 2009 and a lot at stake, no party would like to end their journey short. Though there will be minor hiccups, right from the Nuke Deal to economic policies, no party will want to rock the boat.
9. US economy could head into a recession and whenever US investors get jittery about prospect of US economy they turn to gold as a safe haven. Hence gold might have room for higher levels from where they are today.
10. Last but not the least, the political instability in neighboring Pakistan and Benazir Bhutto’s death. Though this might bear no direct impact on the Indian stock market, this event presents a geopolitical risk that one cannot ignore.

With so many things happening, how on earth is one supposed to understand and act in real time? Besides these, there would be several other unknown reasons (such as the Chinese market coming down sharply: a lot of Chinese company’s profits are through investments they have made in other company IPOs and stocks. These profits have no cash basis) that could play spoilsport and one would certainly see more upward and downward swings in the stock market.

The growth momentum of the Indian economy is expected to continue despite various dampeners because at this moment, capital is literally flooding the Indian market. Further rate cuts by the US Fed could further lead to strong inflows. India will continue to attract foreign funds due to high economic growth and buoyant capital markets despite various measures taken by the Reserve Bank to tighten money supply and SEBI's decision to impose curbs on P-Notes.

One simple strategy can help investors and non-investors. Make a commitment to buy on every fall of 5-7% whether you feel the market will go up or down. Though there will be corrections along the way the big picture in the great Indian bull run is far from over. This is a market to buy on declines and sell later.

source: moneycontrol.com