Tag: Invest In stock market

06 Aug 2020
This is the call to take in Stock Markets now (1)

This is the call to take in Stock Markets now

In the month of Feb 2020, as the news of Corona-effect started spreading, the stock markets around the world started going down. They reached their bottom in India on 23rd March, and the stock markets were 38 percent down from their Feb highs within about a month. While such a fast move down was very surprising, equally surprising was that they retraced almost 28 percent of it back within next Four months – something which has never ever happened in the past whenever stock markets melted down so much in this manner.

And this was not all. A few more strange things happened along with it:-

  • Usually Gold suddenly shoots up whenever stock markets go down. However, this time, Gold remained undecided – went down with markets initially, then up, then followed the stock markets again in going down and finally around 23rd March, decided to move up unilaterally which has continued till date.
  • Silver, another precious metal, moved in a more decided manner, moved down initially and then has been decidedly going up ever since.
  • Oil faced the worst rout ever and touched its lowest point of past 15 years in April 2020.
  • Economies spluttered literally to a halt in almost all the countries and the data points flowing in ever since are only confirming the bad news over and over again.
  • A true vaccine and a trusted medicine for COVID-19 is still nowhere in sight. If they come into a usable form even in the next 3-6 months, how long will it take to inoculate the entire population so that we do not continue to be a threat to each other, is not yet known. And till this threat is eradicated, social distancing norms will continue and thus the productivity of the real economy will remain low.

And amidst all this, the stock markets continue to surge !!

Huge liquidity pumped in by the Governments all over the world, idle population taking to stock trading for want of anything better to do while sitting at home, lucrative valuations provided by fundamentally strong companies due to the prices having moved down, etc, are some of the reasons advanced for this surge of the stock markets. The PE (Price to Earnings) Ratio of the stock markets are at a dangerous 29-30 right now when the 22+ ratio is said to be a Sell signal in the markets.

And to complicate the matter further, the inflation which seemed to be going down initially has now started surging up – not because there is a big demand, but because there is huge supply shortage of goods and services. Will it lead to something called stagflation, as it happened in Japan for almost two decades – nobody knows.

So, what are you as an investor to do? And what are we as a financial advisor to tell you?

To help you take a concerted call, we will give out two options, depending on what is your personal call, risk appetite and how much are you ready to hold out. We will also give our recommendation too but please remember that financial advisors are NOT astrologers. Based on a certain sequence of events, a financial advisor can only hypothesize how it is likely to be but the economy and the stock markets are at full liberty to disagree with them!

Hence, a financial advisor should limit his role to guiding you to meet your future goals and aspirations irrespective of the economy in the long run, be the go-to person with slightly more expertise in financial management and manage your emotions so that you do not harm yourself by taking incorrect decisions. A financial advisor certainly should not be in the business of short term predictions of stock market behaviour.

OPTION 1 – Decrease your exposure to the equity markets and move to safer debt funds: Markets are at a high without any valid reasons and the outlook seems poor. A PE Ratio of 29-30, bleak near-term future outlook of the economy, complete resolution of COVID-19 nowhere in sight right now which may take many months or maybe more than a year, even the big companies defaulting, and of course, the accumulated high interests of deferred loans have to be paid soon which most of the borrowers may not be in a position to pay.

All this indicates that the market euphoria may not be justified and the markets have to trend down sooner than later. Hence, better to get out of this sideways-moving stock market while the going is still fair and we are just a few percentage points from the top reached in Feb 2020. It is better to get into safe debt funds which invest in Govt bonds, bank FDs, PSU FDs and similar like products where one gets safety, flexibility of investment and withdrawal, and the huge tax-efficiency if one stays invested for 3+ years.

OPTION 2 – Stay invested as per the worked-out asset allocation and ride out these times: Markets do not go up and stay up on euphoria only but actually factors in at least the next six months. This might, to some extent, explain the behaviour of the markets – they’re seeing something which most of us are not able to see. RBI is cutting rates of interest like all other Central banks across the world. This is bringing down the cost of capital for the companies since almost all the companies borrow money to expand. The Government is putting all its might behind turning the economy around. Almost 70 per cent of the companies have already opened shutters.

Whenever interest rates go down so drastically, markets always go up sooner than later, as per the very basics of economic theory of financial markets – the more the rate cuts, the more grand is the move up. This has always proven to be true in the past. Even today in the markets, whenever any positive news comes, markets rebound like a coiled-up spring. Hence, stay invested and wait for better times to come rather than get out and miss the imminent up move. Even if one gets out, there is no other better avenue available – bank FDs and similar ‘safer’ investments are down and will further go down (next MPC meeting on 6th Aug!), literally giving hugely negative tax-and-inflation adjusted returns. When a bank FD earns you 5.5 per cent with inflation at 6 per cent, the net returns for a 30 per cent tax bracket individual comes to a Negative 2.15 per cent.

So, what do We recommend?

Both the above Options seem feasible due to the very peculiar and unique medico-economic situation prevalent right now. In fact, prominent economists in India and the rest of the world are roughly equally divided between both the camps right now. Finally, it is you who has to decide what is the most comfortable scenario for you, away from the greed-fear-speculation-regret cycle.

If you take Option 1, you get into safety, earn the interest rate prevalent (which though takes your purchasing power to Negative) but also miss out on the rally in equity markets when it comes since timely switch back is a very difficult preposition which hardly anybody is ever able to do.

If you take Option 2, you are open to market vagaries and maybe large volatilities. Nobody knows how long will this medical and economic situation last – may take anything from a few more months to maybe even two years. Nobody can also predict whether the markets will go down from here or not, and if they go down, when will it be and by what count. However, this is for sure that the equity markets will test everybody’s patience and remain volatile for quite some time. However, if you stay invested in equity, when the up move comes, you are right in there and will get the benefit. Due to the extraordinarily low rates, it is likely that the up move of the market will be very strong whenever it comes.

Finally, it comes down to your comfort level. Take the risk since equity has always been about risks and patience. Not be ready to take the risk and take the flight to safety but also miss out on the fabulous gains sure to come – time and extent not known!

21 Jan 2016
Great times to increase your market exposure

Great times to increase your market exposure

Stock Markets have been unrelenting for the past one year and, it has only intensified in Jan 2016. Most of the retail investors have not understood the reason why it is so – Acche Din to Aane Wale The!

They’re told that China is slowing down, so the world is slowing down. But the US of A, the world’s largest economy, is on an acknowledged growth path now.

They’re told that Oil prices drop is affecting the world growth. But cheap oil results in India saving about 60-70 Billion USD a year – how can that be bad for us? Same is the case with other commodity price drops the world over.

They’re told that Govt’s policies have not delivered and the economy is not doing well. But everybody can see that the structural reforms being undertaken will cure the ills of past so many decades.

It all becomes very confusing as to what is the reason for this huge decline in markets so fast and so much. Actually the drop in stock prices in India has not much to do with India or Indian economy. The drop is largely due to Foreign Institutional Investors (FIIs) pulling money out of India. These FIIS are largely either the Middle East sovereign funds pulling out to meet their economy’s deficits due to oil revenues falling or the Emerging Market (EM) funds pulling out anticipating a big Chinese shadow on EM economies which are primarily the commodity producers. The poor Indian corporate earnings last year, which are likely to continue for about two more quarters at least, has also not helped. But ultimately, all global economy pundits expect India to have a robust growth in times to come.

Do you know that there is a big segment which is quietly buying in tandem with FII sales? The equity mutual funds (MFs) are buying what FIIs are selling. Till 19 Jan 2016, FIIs sold stocks worth 9666 Crores while Indian MFs bought worth 7866 crores. And do you know, your neighbour is quietly increasing his SIPs (Systematic Investment Plans) while you contemplate getting out of the markets. In 2015, a weak equity year, new SIPs increased by 66% compared to 2014 when the markets were really robust. In money terms, it amounts to Rs 2399 Crores worth of additional SIPs from people like you and me. Indian investor is really taking full advantage of the DISCOUNT SALE that is on in the equity markets now.

Please carefully read below what Prashant Jain, CEO of HDFC MF, has written in Economic Times today (21 Jan 2016). He has referred to his article on similar theme in 2012 which we had posted on our blog at https://humfauji.in/blog

Make the most of this opportunity

Finally our advice to you: This is as good as it gets to buy quality equity Mutual Funds. Use it to your advantage. Don’t treat your notional losses to be real losses – they turn real only if you panic, lose patience and get out of the markets. This is the time to buy equity MFs, increase your SIPs and sit tight. The long-term winner is being decided now by the markets – don’t throw it away. If you’ve invested for the long term, don’t judge your portfolio by short term volatile returns.

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31 Oct 2013
Never Ignore Stock Markets-humfauji.in

Never Ignore Stock Markets

At the start of every New Year, there are a series of articles focused on which asset class is likely to do well for the next 12 months. There are two fundamental problems with such a discussion:

  1. It limits the time frame of the discussion to the next 12 months. This is tantamount to projecting what your child will grow up to be like based on what he ate for breakfast this morning;
  2. There is a false assumption that, though you may be guided into the right asset class by your private client wealth advisor, you will be sold the correct specific investment as opposed to the instrument which pays the wealth advisor the highest commission. This is tantamount to saying that because your child goes to school he actually learns something useful on how to deal with life.

 

Stocks are risky, but can make you money

Since January 1981, an investor in the S&P BSE-30 Index would have seen an investment of Rs 148 now be worth Rs 21,000. This 142x increase in your capital translates into an average gain of 16% each year, over the past 32 years. Note that I have not counted the benefits of dividends (about 2% each year) on the assumption that the changes in the basket of stocks in the Index would force you to pay a brokerage commission benefit of lower taxes. The capital gain tax on a stock held for more than one year is zero. These tax rates and rules have changed over time. For example, the holding period to qualify as a “long term” used to be “more than three years”.

Before you rush to buy stocks, recognise this: in 9 of these 32 years (28% of the time) you would have lost money. The value of your investment would be lower than your investment at the start of the calendar year. That is a lot of monetary pain to bear especially when your friend at the Diwali dinner, smiling as he munches on the deep fried samosa, is boasting how smart he is because he invested in bank deposits and FDs. But you could take the smile off his face with this simple fact: deep fried food is bad for health as sure as investing only in FDs is bad for your ability to continue your existing consumption pattern way into the future. If your friend had invested in a Fixed Deposit at 15% per annum in January 1981 (those rates don’t exist today, but it was Diwali and a time to be generous!) and was paying approximately 20% tax on that interest income every year for a net return of 12%, his initial capital of Rs 148 in January 1981 would be worth Rs 6,230 today – an increase of 42x. This investment in FDs is far lower than the 142x increase in the value of a similar investment in the S&P BSE-30 Index. A 12% net return after tax on FD barely keeps pace with the rise in prices of things you consume over long periods of time. And to find a safe FD which will earn that 12% after tax rate of return is pretty impossible.

Build a mix of investments

Before you rush to invest all your savings in stocks, recognise that the objective of any investment is:

  1. To convert your idle savings into earning you a rate of return that beats inflation -this allows you to maintain the lifestyle you have today in the future even though the prices of goods you consume have risen;
  2. To add to your wealth for paying the expenses of some future events like the education of a child, the marriage of your children, or buying your first home;
  3. To “park” your money in a safe place for a rainy day – keeping in the mattress is also an option as is keeping it in a bank;

Given that an investment in stock markets can lose money in any given year, some of your money does need to be in safe places like FDs or bank deposits. Over the past 32 years, FDs have given a better rate of return than stocks in 14 years (44% of the time). If one were to compare the rate of return of FDs and stocks over any 3-year period then FDs have done better in 11 of the total 31 time periods (35% of the time). If one were to compare the rate of return of FDs an stocks over any 10 year period, then FDs have done better in 4 of the 24 year time periods (17% of the time). Based on price movements since 1980, it would seem that buying equities gives you the same opportunity to make money as investing in an FD in any one-year period. But over longer time periods, being in stocks gives you a better opportunity to earn more money than even a 15% pre-tax FD (even if you can find such a safe investment).
Table 1: Stock markets rewarded those with patience over the long term

Investment horizonBlocks of time since Dec 1980In how many of these time periods did FDs give a better return?In how many of these time periods did an investment
in the stock markets give a better return?
1-year period32 time periods14 (44%)18 (56%)
3-year period31 time periods11 (35%)20 (65%)
5-year period29 time periods11 (38%)18 (62%)
10-year period24 time periods4 (17%)20 (83%)

Gold should account for between 5% to 10% of your investment pool and remains the only hedge against the excessive spending habits of governments – worldwide. Property does not feature as an investment in my view but you could buy what you and your family will need and will use.

Allocate your assets, but allocating your trust is more important

During the annual discussions on ‘where to invest’, the investors and the media spend too much time focusing on asset allocation. This is because the theory of finance assumes that financial firms work for the benefit of their customers.
Theories are best left in classrooms to the imagination of teachers. The experience of investors in India – and globally – has exposed the selfish motive of financial firms to ensure their bottom line, even if it means there is a loss to their client. In the 2005-2008 time period, many investors correctly invested in equity mutual funds, but they were sold sector funds which paid excessively high-commissions. By shovelling client assets into these highly suspect products that should not really be a part of any simple allocation, the financial firms got their fees, the employees working in these temples of theft got their great salaries and bonuses, and the investors lost their savings.
Regulators in India – and globally – have failed to protect the investor from the powerful lobby of the financial firms. Unlike a published track record of, say, a mutual fund, which any investor can access and decipher to make their investment judgements, there is no track record available on how wealth managers at the banks and broking firms have advised their clients. The financial juggernauts remain large due to a lax regulation which, idiotically, continues to equate high capital with high integrity. The superpower status of the financial giants is also due to the lethargy of investors who – like deer standing frozen in beaming headlights – are waiting to be blown up by the next time bomb that many advisors will slip into their portfolio.

In a recent Supreme Court discussion on the Sahara Group, a judge stated that the corporate Sahara could no longer be trusted. Some investors have not waited for a court to comment on the lack of trust – they continue to invest a lot less in equity than they should. This is a pity because, over long periods of time, equity is the asset class to always have some exposure to. In the long run, we may all be dead, but we hopefully leave our children some wealth built by a carefully balanced and judiciously built portfolio.

 

(Courtesy: ‘The Honest Truth’ by Ajit Dayal on www. Equitymaster . com dt 06 Nov 2013)

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