Stock markets are interesting places.

They never behave as

forecasted. There are more people making a living by telling others
what to do out there than actual people who invest. Simple proof
that no one has got the grip on it. Since evolution.
If you go through the archive of expert forecasts for our markets,
the estimation would vary between 27000 to 35000 on the Sensex
by the end of this calendar year. Now, stock broking houses are
changing their forecasts, as if they never made an earlier one. The
new range seems to be 22000 to 27000. They are here to make
noise and to get the public to keep buying. They know that every
once in a while they need a new set of believers as the first lot get
ruined and swear off the markets. This vicious cycle of conmanship
goes on uninterrupted.
The point is that the Index, whilst being a misleading thing, is also a
barometer of investor sentiment. In a way it impacts investor moods
and makes them bearish or bullish. No analyst or research house will
be heard if he says that he does not care where the market goes,
but here is an investment opportunity in a stock that I have spotted.
I think it is of a company with a great future and available at a
reasonable price. Etc and so on.
Alas, the markets
global investors of
the other. They do
instances because
prohecy.

are now driven by institutional investors and

whom many invest only through some index or
not make a real impact on the market in many
their buying the index is often a self fulfilling

If we look at the Globe, most places are facing an economic

slowdown. The growth engines are slowing down. The reckless pace
at which consumerism grew, is coming down. In every country, the
political leader is finding new ways to destroy the finances with
more and more freebies. The problem is that many of the large
economies are now burnt out cases. Most of them produce far more
than what they need. So, they have to export. Exports are shrinking
as each country tries to protect itself. It is an irony. Inward looking
countries are likely to remain more stable over the next ten years or
more. Every developed nation seems to have built up a high cost
economy, where everything is expensive and nominal wages are
going higher and higher at a frantic pace.
India has a peculiar problem. We make what we want and consume
what we make. With one notable exception- Oil. And this is more
than offset by the inward remittances that flow from our NRIs. But
the Oil deficit is the principal cause of worry, apart from the
exploding population, which will perhaps need a natural disaster to
be set right. Till then, the resources India has, cannot feed the
moutns it has. Many of the products that we consumer are costed in

dollars, whereas the income is in rupees. So there is a gap that

keeps getting bigger.
In a way, the urbanisation, the penetration of communication (not
just internet, where we rank a lowly no.155) are all contributing to
increasing the lifestyle aspirations of over a billion Indians.
Unfortunately, the disparity is extreme as opportunities are rather
limited.
As an investor, it is best to keep these thoughts in the back of our
mind, before making our shortlist of investment opportunities.
Circling back and forth, we will find ourselves coming back to
sectors like FMCG, automobiles, durables, banks, pharamceuticals
etc. Where we can see this billion people spending and buying.
Will our economy grow at five percent? Probably yes. Will it grow at
eight? Most probably no. Will it shrink? My view is no. Even a zero
growth for a couple of years may not be a bad think for any
economy, so long as the rest of the world is in trouble.
Our stock markets have not corrected enough at all. Another twenty
percent correction and perhaps we become attractive. But do not
wait for a precise twenty. Start buying at ten or more.
And yes, I will, for now, keep away from companies that export or
earn in foreign currency. There is simply too much uncertainty out
there. Prefer the Make in India and Sell in India companies to the
Make in India and Export from India companies in the medium
term. IT is a conundrum. Personally do not like the sector, but guess
labour arbitrage plus domestic opportunities will make some
companies attractive.
I would focus on companies. Keep the noise and the sensex out of
my head. Large companies shares are getting corrected as the FIIs
start to head for the exit or at least take back something to show to
their investors. And the Indian retail has just warmed up and that
money is still flowing in to mid caps. It is creating a wonderful
opportunity to add some large caps.
The other interesting set is from the PSUs. Keep looking for those
sectors where government policies are enabling a return to profits
for companies in sectors like Petroleum. Even if the owner is not the
best, the risk reward is in favour of putting some part of the asset in
to these kind of plays. In PSUs, I will still keep away from the banks.
They are rudderless and unless there is one big write off and
recapitalisation, combined with the exit of the owner, things are
terrible. Putting in a new Chairman or CEO alone does not count for
anything. Yes, they will make the right noises and talk up the share

prices, but I doubt if there is going to be any big change structurally.

Government has to get out of driving the banks.
Am I worried if there is a global market correction of twenty percent
or more? Not so much. I do not think that quality companies in India
are going to shrink. Yes, if there is a margin contraction and
earnings drop, they may present buying opportunities.
The markets also react in the short term to interest rate signals from
the Central Bank. The bigger issue is not one of interest rates. High
quality borrowers get to borrow at below the bank interest rates
from other sources. It is the poor risk and the highly leveraged ones
that depend on bank loans. For them a one or two percent interest
swing is not going to make a huge difference. There are other
factors like commodity prices and global contraction that are driving
demand, sales and earnings. An interest rate cut of a decent
magnitude, at best, would lower your EMIs and give you some extra
spending money. I doubt whether by itself, it will give a push to
housing demand. Right now, the market is caught between a black
box named China, global slow down and Indias apparent insulation
due to benevolent oil prices on the OUTSIDE and a big struggle for
earnings growth on the INSIDE. So, an interest rate cut would be the
end of the bull case for the market.
In all this noise and panic, keep your focus on high quality stocks. If
they come to attractive levels, maybe we could buy. Take advantage
of the crowd behavious and the noise.
R Balakrishnan
(balakrishnanr@gmail.com)
Sept 29th, 2015