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| Investing amid conflicting signals |
| Amar Pandit / Mumbai May 31, 2009, 00:41 IST |
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Rely on your instincts and don't worry about others.
The sudden sharp U-turn of equity markets in the past 10-odd days have given a lot of investors the feeling that they have been left out along with the Left. At the same time, the scars of the past are haunting people who consider re-entering the market now. The Sensex levels of 7,000 and 8,000 have been deeply etched in every equity investor's mind and those who want to invest are sitting on the sidelines just to enter at lower levels. Yet, even perennial bears and global hedge fund managers are now saying there might not be much downside from the current levels of 14,000.
At the same time, gold has been flat for almost a couple of months and has been slightly inching upwards. Real estate is showing no signs of revival, but builders believe things will suddenly improve because of the change of guard at the Centre. Interest rates, not just on loans but also on fixed deposits, have gone down. While all this is happening, oil has gone up to $65 from a low of $34 just a few months earlier. Higher oil prices could result in higher inflation in the future, which could mean interest rates firming up. Recently though, some banks announced that interest rates would be cut by around 1.5% in the near future. Hence, there are many conflicting signals and the key question is what one must do now.
EQUITY
There is no way one can invest at the lowest level of the markets and then get out at the highest level. The strategy must be to buy lower and sell higher. Don't worry about what others are doing. A lot of money is lost waiting for corrections to come and, hence, one must look at investing in a staggered manner. Invest on every dip and also through systematic investments.
This is also the time to weed stocks and funds with poor fundamentals and move into solid companies that are available at extremely low valuations.
If you have made good profits in the past couple of months, book and use these to pay off your loans or reduce your liabilities. Market analysts now think the budget, monsoon direction and Q1 earnings could be the next trigger. There could be a couple more no one knows of today which could surprise the markets. A correction is certainly on the cards, but no one knows when that will happen. Do not wait for the markets to go back to 8,000 but start deploying on every major dip.
GOLD
Though I am very bullish on gold, I believe you must book some profits if you have sizeable exposure to it. Sure, gold can go up from here, but the immediate upside looks capped. In equity market parlance ,we might be somewhere near 18,500-19,000 Sensex levels. Gold, being a volatile asset class, can correct by as high as 10 per cent in a day and don't be surprised to see days of Rs 1,000 falls in gold prices. Over the next two-three years, gold could shine. But, book profits regularly; this is certainly a time to do so.
REAL ESTATE
Builders, of late, have been sounding off bullish tones with the revival of equity markets, QIPs and other alternative sources of funding. However, prices have not corrected enough to spur demand in residential real estate. Interest rates, one of the levers of real estate demand, has clearly gone down and will be mouth-watering a couple of weeks down the line. An even bigger lever, price, which has a huge impact on affordability, must go down by at least 25 per cent for genuine demand to come back in the market.
Don't believe the noise of 'last few flats left' or that people have started buying again. It is only the speculators who are trying to prop up the markets, whereas smart real estate investors are still trying to exit.
DEBT
Keep short-term money in fixed deposits (people in the lower tax brackets), Liquid Plus and Floating Rate Funds. Short Term Bond Funds are also good options from a six to nine month perspective and can deliver around 8 per cent returns. If you have a time horizon of a year, you can still look at Income Plans (Long Term Bond Funds) that could much deliver much better returns. A caveat here is that the government borrowing programme could keep bond yields higher, which might result in negative returns from such bond funds.
The Indian political landscape has changed profoundly in positive ways for the next five years. Implementation of reforms is paramount for success of the high expectations markets have from the change of guard. The key is to understand the changes happening around you and be ready to profit from it.
The writer is director, My Financial Advisor
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