Though there is no clear definition of a bear market, in India such phases have lasted anywhere from 56 weeks to 84 weeks, with the market losing between 41% and 57% from the peak levels. Here are some ways to survive the meltdown.
Non-equity investments
With equity losing steam, investors are looking to park their money in cash, fixed deposits and real estate. Among these, cash is the favoured option despite the low returns that it offers. Though some may look at gold as an alternate investment, it does not have any correlation with equities and should be an investment irrespective of the direction the market takes. Here is what the non-equity options offer and the things that one must keep in mind while investing in them.
Cash
Safe haven in short term.
Returns from cash and cash equivalents are very low.
Cash funds are generally safe, but during the credit crunch of 2008, even they felt the heat.
Remember
Falling interest rates affect returns.
Cash funds carry a credit risk.
Rising inflation reduces the value of the cash holding.
Property
Falling interest rates mean cheaper borrowing.
Rentals provide steady source of income.
Less risky than equities, but more risky than FDs.
Remember
Property prices could be as volatile as equities.
High prices mean that rental yields are very low.
Difficult to sell quickly.
Fixed deposits
Low-risk option.
Provide steady source of income.
Diverse options and maturities:
- Govt bonds, bank or corporate FDs
- Short-, medium- and long-term
Remember
If interest rates rise, investor loses out.
It's best to invest in bonds of varying terms.
There's a credit risk if bank or company goes bust.
Inflation eats into the value of investment.
Equity investing strategy in bear markets
Having suffered heavy losses in stocks, many investors want to keep off equities. But there are ways in which you can invest in stocks with minimal risk. Investing in dividend yield stocks, defensive sectors and funds with holdings across market capitalisations can help make money in a volatile market.
Dividend yield stocks
Depressed share prices push up dividend yields.
Dividends can compensate for the fall in share prices.
The dividend yield acts as a cushion, preventing the share price to fall beyond a point.
Remember
Dividends and payout ratio are not guaranteed.
Very high dividend yield could be because the share price has been beaten down.
Rising interest rates make bonds more attractive because they carry less risk.
Defensive sectors
Some sectors fare better during bear markets:
-Utilities
-Pharmaceutical
-Oil companies
-FMCG, tobacco manufacturers
Utility companies pay generous dividends, which help sustain share prices.
Remember
Most sectors tend to move in cycles.
Sectoral funds allow focused diversification. But understand a fund's objectives before investing.
For instance, a pharma fund could be investing in risky bio-tech companies.
Five alerts to detect bear market bottom:
1. Cash is king: At the bottom of a bear market, everyone agrees that cash is the best place for your money. Even fund managers hold stacks of cash. This money eventually enters the market, starting the next bull run.
2. Value is easy to find: PE ratios will be near historical lows. The average dividend yield will be high and share prices may be lower than book value. On 1 Jan 2003, the Sensex PE was 14.7, when the index was at 3,390.
3. Falling interest rates: Interest rates usually start falling at the end of a bear market. Lower interest rates eventually revive economic activity.
4. IPO drought: There are very few new issues (IPOs) at the bottom of the bear markets. Promoters prefer to wait for the market sentiment to revive before they go public in order to get a higher value for their companies.
5. Liquidity increases: Broad money supply tends to increase at the turn of the bear market. Money is the lifeblood of the economy. Increased supply tends to push up asset prices.
Source
Showing posts with label Bear Market. Show all posts
Showing posts with label Bear Market. Show all posts
Tuesday, March 10, 2009
Sunday, March 1, 2009
Bear market to end soon !!!
Did I catch you on that ? are you expecting someone would be able to predict that for everyone ?
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
Source
For the last one year, there has been an army of people trying to predict the end of the bear market. Most of the so called pundits were expecting the global recession to end by Q1’09. Now the predicitions have shifted to Q3’09 or towards the end of the year. The same pundits were predicting oil to touch 200 dollars a barrel. As the saying goes – If I had a penny everytime a bozo made a prediction, I would be rich !
I would suggest you to read N N taleb’s books – Fooled by randomness and The black swan which talks of this bias. All of us have this strong desire to predict and see patterns. It is a strong, innate human tendency which causes most of us to seek predicitions of the future and see patterns where none exist. The problem with markets is that there are often no such patterns and the future can rarely be predicted accurately for a long period of time. Yes, some so called gurus can get one predicition correct, but that does not mean that this person has some special ability to see the future.
If you predict often, you will be correct a few times too. There is considerable research into the accuracy and success rate of such predictions and most of the studies point to less than a 50% success rate. That is worse than a coin toss !!
How to invest without predicting the market ?
So how does one invest, if one cannot predict where the market will be in the future ? I think there is a big mis-understanding that one has to know where the market is going, to be a successful investor.
If you plan to invest in an option which will expire at a fixed time, then you will need to predict how the market will perform during the duration of the option. However if you are able to identify a good company with a sustainable competitive advantage, which is likely to do well over the next few years, then you are likely to get a good return on investment.
As the company does well, the underlying intrinsic value is bound to increase. When this happens, the gap between the price and the value will increase (assuming the price is stagnant ) and the stock will be get progressively more undervalued. In most of the cases (not necessarily all), this undervaluation will create an upward pressure on the stock price. In most of these cases, the gap closes suddenly and the returns are made quickly over a very short interval of time. It is however diffcult to predict when this will happen.
So what happens if the price takes longer to recover ? Well, if the intrsinc value is increasing, then you have an opportunity to increase your holding as the gap keeps getting larger and the returns should be better when the gap finally closes.
So why does’nt everyone do it ?
For one, it is painful to watch your stock stagnate over long periods of time. If you look at price to validate your decision, then a stagnant price only increases your self doubt and anxiety. Most investors are not wired to ignore the price and focus on the intrinsic value. That also explains why it is diffcult to practise value investing.
Where do we go from here ?
For starters, stop trying to figure when the bear market will turn. If your imvestments are based on the market turning soon, you could be in for a lot of dissapointment if that does not happen.
I personally watch CNBC, read the news and listen to all possible predicitions from all and sundry, but only for entertainment. Whenever some tries to give me an elaborate reason on when the market will turn or the recession will end, I have a single thought in mind – ‘How the hell do you know ?
What am I doing ?
I am reviewing my current holdings. The Q3 results have been announced for most of my holdings and I am in the process of analysing the same.
In addition I am focussing on learning about behavioral finance and biases. I would be updating my templates based on my learnings and would be re-analysing my holdings again. It is quite possible I may discover that I should exit some holding and some bias is holding me back. I will be posting such analysis when I come to such a conclusion.
Source
Sunday, January 11, 2009
7 lessons to learn from a market downturn
You can never really understand investing until you weather a market downturn. The valuable lessons learned can help you through the bad times and can be applied to your portfolio when the economy recovers. Listed below are some common investor experiences during tough economic times and the lessons each investor can come away with after surviving the events.
Lesson #1: Evaluate your egg baskets
You're pulling your hair out because everything you invest in goes down. The lesson: Always keep a diversified portfolio, regardless of current market conditions.
If everything you own is moving in the same direction, at the same rate, your portfolio is probably not well diversified, and you could stand to reconsider your asset-allocation choices. The specific assets in your portfolio will depend on your objectives and risk-tolerance level, but you should always include multiple types of investments.
Taking a more conservative stance to preserve capital should mean changing the percentages of holdings from aggressive, risky stocks to more conservative holdings, not moving everything to a single investment type.
For example, increasing bonds and decreasing small-cap growth holdings maintains diversification, whereas liquidating everything to money market securities does not. Under normal market conditions, a diversified portfolio reduces big swings in performance over time.
Lesson #2: No such thing as a sure thing
That stock you thought was a sure thing just tanked. The lesson: Sometimes the unpredictable happens. It happens to the best analysts, the best fund managers, the best advisors, and, it can happen to you.
The perfect chart interpretation, fundamental analysis, or tarot card reading won't predict every possible incident that can impact your investment.
Use due diligence to mitigate risk as much as possible.
Review quarterly and annual reports for clues on risks to the company's business as well as their responses to the risks.
You can also glean industry weaknesses from current events and industry associations.
More often, an investment is impacted by a combination of events. Don't kick yourself over unpredictable or extraordinary events like supply-chain failures, mergers, lawsuits, product failures, etc.
Lesson #3: Proper risk management
You thought an investment was risk-free, but it wasn't. The lesson: Every investment has some type of risk.
You can attempt to measure the risk and try to offset it, but you must acknowledge that risk is inherent in each trade. Evaluate your willingness to take each risk.
Lesson #4: Liquidity matters
You always stay fully invested, so you miss out on opportunities requiring accessible cash. The lesson: Having cash in a certificate of deposit or money market account enables you to take advantage of high-quality investments at fire sale prices. It also decreases overall portfolio risk.
Plan ahead to replenish cash accounts. For example, use the proceeds from a called bond to invest in the money market instead of purchasing a new bond.Sometimes cash can be obtained by reorganizing debt or trimming discretionary spending. Set a specific percentage of your overall portfolio to hold in cash.
Lesson #5: Patience
Your account balance is lower than it was last quarter, so you overhaul your investment strategy before taking advantage of your current investments. The lesson: Sometimes it takes the market an extended period of time to bounce back.
Your overall portfolio balance on a given date is not as important as the direction it is trending and expected returns for the future. The key is preparedness for the impending market upturn based on an estimated lag time behind market indicators. Evaluate your strategy, but remember that sometimes patience is the solution.
Lesson #6: Be your own advisor
The market news gets bleaker every day - now you're paralyzed with fear! The lesson: Market news has to be interpreted relative to your situation.
Sometimes investors overreact, particularly with large or popular stocks, because bad news is replayed continuously via every news outlet. Here are some steps you can follow to help you keep your head in the face of bad news:
Pay attention and understand the news, then analyze the financials yourself.
Determine if the information represents a significant downward financial trend, a major negative shift in a company's business, or just a temporary blip.
Listen for cues the company may be downgrading its own expected returns. Find out if the downgrade is for one quarter, one year or if it is so abstract you can't tell.
Conduct an industry analysis of the company's competitors.
After a thorough evaluation, you can decide if your portfolio needs a change.
Lesson #7: When to sell and when to hold
The market indicators don't seem to have a silver lining. The lesson: Know when to sell existing positions and when to hold on.
Don't be afraid to cut your losses. If the current value of your portfolio is lower than your cost basis and showing signs of dropping further, consider taking some losses now. Remember, those losses can be carried forward to offset capital gains for up to seven years.
Selective selling can produce cash needed to buy investments with better earnings potential. On the other hand, maintain investments with solid financials that are experiencing price corrections based on expected price-earnings ratios. Make decisions on each investment, but don't forget to evaluate your overall asset allocation.
Conclusion
Downward stock market swings are inevitable. The better-prepared you are to deal with them, the better your portfolio will endure them. You may have already learned some of these lessons the hard way, but if not, take the time to learn from others' mistakes before they become yours.
Lesson #1: Evaluate your egg baskets
You're pulling your hair out because everything you invest in goes down. The lesson: Always keep a diversified portfolio, regardless of current market conditions.
If everything you own is moving in the same direction, at the same rate, your portfolio is probably not well diversified, and you could stand to reconsider your asset-allocation choices. The specific assets in your portfolio will depend on your objectives and risk-tolerance level, but you should always include multiple types of investments.
Taking a more conservative stance to preserve capital should mean changing the percentages of holdings from aggressive, risky stocks to more conservative holdings, not moving everything to a single investment type.
For example, increasing bonds and decreasing small-cap growth holdings maintains diversification, whereas liquidating everything to money market securities does not. Under normal market conditions, a diversified portfolio reduces big swings in performance over time.
Lesson #2: No such thing as a sure thing
That stock you thought was a sure thing just tanked. The lesson: Sometimes the unpredictable happens. It happens to the best analysts, the best fund managers, the best advisors, and, it can happen to you.
The perfect chart interpretation, fundamental analysis, or tarot card reading won't predict every possible incident that can impact your investment.
Use due diligence to mitigate risk as much as possible.
Review quarterly and annual reports for clues on risks to the company's business as well as their responses to the risks.
You can also glean industry weaknesses from current events and industry associations.
More often, an investment is impacted by a combination of events. Don't kick yourself over unpredictable or extraordinary events like supply-chain failures, mergers, lawsuits, product failures, etc.
Lesson #3: Proper risk management
You thought an investment was risk-free, but it wasn't. The lesson: Every investment has some type of risk.
You can attempt to measure the risk and try to offset it, but you must acknowledge that risk is inherent in each trade. Evaluate your willingness to take each risk.
Lesson #4: Liquidity matters
You always stay fully invested, so you miss out on opportunities requiring accessible cash. The lesson: Having cash in a certificate of deposit or money market account enables you to take advantage of high-quality investments at fire sale prices. It also decreases overall portfolio risk.
Plan ahead to replenish cash accounts. For example, use the proceeds from a called bond to invest in the money market instead of purchasing a new bond.Sometimes cash can be obtained by reorganizing debt or trimming discretionary spending. Set a specific percentage of your overall portfolio to hold in cash.
Lesson #5: Patience
Your account balance is lower than it was last quarter, so you overhaul your investment strategy before taking advantage of your current investments. The lesson: Sometimes it takes the market an extended period of time to bounce back.
Your overall portfolio balance on a given date is not as important as the direction it is trending and expected returns for the future. The key is preparedness for the impending market upturn based on an estimated lag time behind market indicators. Evaluate your strategy, but remember that sometimes patience is the solution.
Lesson #6: Be your own advisor
The market news gets bleaker every day - now you're paralyzed with fear! The lesson: Market news has to be interpreted relative to your situation.
Sometimes investors overreact, particularly with large or popular stocks, because bad news is replayed continuously via every news outlet. Here are some steps you can follow to help you keep your head in the face of bad news:
Pay attention and understand the news, then analyze the financials yourself.
Determine if the information represents a significant downward financial trend, a major negative shift in a company's business, or just a temporary blip.
Listen for cues the company may be downgrading its own expected returns. Find out if the downgrade is for one quarter, one year or if it is so abstract you can't tell.
Conduct an industry analysis of the company's competitors.
After a thorough evaluation, you can decide if your portfolio needs a change.
Lesson #7: When to sell and when to hold
The market indicators don't seem to have a silver lining. The lesson: Know when to sell existing positions and when to hold on.
Don't be afraid to cut your losses. If the current value of your portfolio is lower than your cost basis and showing signs of dropping further, consider taking some losses now. Remember, those losses can be carried forward to offset capital gains for up to seven years.
Selective selling can produce cash needed to buy investments with better earnings potential. On the other hand, maintain investments with solid financials that are experiencing price corrections based on expected price-earnings ratios. Make decisions on each investment, but don't forget to evaluate your overall asset allocation.
Conclusion
Downward stock market swings are inevitable. The better-prepared you are to deal with them, the better your portfolio will endure them. You may have already learned some of these lessons the hard way, but if not, take the time to learn from others' mistakes before they become yours.
Sunday, October 19, 2008
Buy American. I Am.WARREN E. BUFFETT
THE financial world is a mess, both in the United States and abroad. Its problems, moreover, have been leaking into the general economy, and the leaks are now turning into a gusher. In the near term, unemployment will rise, business activity will falter and headlines will continue to be scary.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.
Why?
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 percent. Or think back to the early days of World War II, when things were going badly for the United States in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank. In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.
Today people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value. Indeed, the policies that government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts.
Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later. In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: “I skate to where the puck is going to be, not to where it has been.”
I don’t like to opine on the stock market, and again I emphasize that I have no idea what the market will do in the short term. Nevertheless, I’ll follow the lead of a restaurant that opened in an empty bank building and then advertised: “Put your mouth where your money was.” Today my money and my mouth both say equities.
Warren E. Buffett is the chief executive of Berkshire Hathaway, a diversified holding company.
Friday, July 18, 2008
Most pain in mkts may be over
Most pain in mkts may be over:
Raamdeo Agrawal ,Director and Co-Founder, Motilal Oswal Securities, said it is too early to say if today's rally can be sustained. "One should not write off crude oil bulls so early as it is likely to resume its gains. We have not yet seen the worst in US financial markets."
Valuations are around 12-13 times earnings, so most of the pain may be over, he said. "We are seeing some stability in markets, but don't expect large buying."
Agrawal feels the profitability of steel companies will not suffer due to low cost structure.
Excerpts from CNBC-TV18’s exclusive interview with Raamdeo Agrawal:
Q: Is the rally sustainable?
A: It is too early to say because after so many days of a sustained downturn, there is a good day of relief. After 7-8 days of major downswing, you get one-day of 600-700 points upmove on the back of USD 8-10 of decline in oil.
But I was speaking to a few people in global fund management and commodity markets. They were saying don’t write-off the oil bulls so early because they seem to have a pretty good grip on oil prices and the producers are also more or less with them. So, it is too early to say that oil is completely off the curve and happy days are here. With respect to the kind of crisis unfolding in the US financial sector, we are yet to go to the worst in terms of write-offs and the challenges that are ahead. So, I would still be little cautious at this juncture.
Q: Do you think any upmove would be more in the nature of a relief rally or a trading rally at this point, not a final bottom?
A: Some stocks stories are actually good, whether in banks or telecom or auto. They should not be treated in the same league as other stocks. Till recently, everything was going down. Whatever you sell, you are right at any price. So that divergence must happen and this particular quarter’s results will also help in that process.
But at these levels in the market, clearly good stocks or great stories must start showing their strength. Firstly, there should be a divergence between a good stock and a bad stock. After that, some kind of broad rally will start.
Q: The only sector that got punished today was metals. What have you made of all the suggestions of a price band for steel and how that might impact the sector?
A: You keep getting conflicting views. Unfortunately, the industry is not a very generic industry. For example- it’s not like steel produced by every producer is of the same type. So, you cannot have price control.
Then, there is lot of value additions and the components are made and then the products are made. So, this is one industry where it is very difficult to actually dictate the price because one producer is integrated for one raw material and the other producer is integrated for other two raw materials also.
So, the profitability of the industry is dependent on scale and the level of integration and things like that. So, it will be very tough for the government to have a sensible price control kind of a mechanism over there.
Their compulsion is to control the so-called Wholesale Price Index (WPI) and there is some national objective to help the government in terms of managing inflation. But I don’t think that eventually profitability will suffer big time because the cost structure is so low for Tata Steel and lot of other companies that they will still make lot of money in the days to come.
Q: How are you summing up the Ranbaxy situation after all the volatility of the last few days?
A: In Ranbaxy, we were very fortunate to do trade on the very first day or second day. But the way, things are opening up now and suddenly this US FDA inquiry is being given so much prominence, which was not there till the deal happened. Suddenly there are things that were not there in the picture. Whether the media is playing too much out of that or not is not clear.
Actually, even the US FDA is getting much more sensitive because the deal has happened. But somehow there is too much attack on the current deal. Going by whatever we have been hearing from the management and what we can read in the terms of the deal, the probability of the deal going through is far higher. I would put it more at like 80-85% than the deal not going through.
In any case, at Rs 440-450 whether the deal is going through or not, fundamentally it is a reasonably good buy.
Q: Do you still think that there is much more to go by way of time before this bear market gets over?
A: Yes, it looks like. There is still life in the bulls where there is one little excitement and people come and pull the market big time. Look at the severity of the problem in the US markets and what it can do to the global situation. It is just about six months since we saw the peak. Probably, this will be the year when you will see the top as well as the bottom.
So, in terms of declines, even at Rs 950-1,000 EPS and current valuations of about 12-13 times, we are done in terms of the bulk of the decline. Day before yesterday the markets were down almost 5%. If you look at the actual total market cap drop, it was less than 2%. There is a lot of noise and excitement in terms of the market going down and the actual damage is much less in terms of the decline in the prices of the broader market.
So, there is some stabilisation happening in terms of valuations. But I would not think that suddenly buying will emerge and we have created a bottom. There is still some more time there.
Valuations are around 12-13 times earnings, so most of the pain may be over, he said. "We are seeing some stability in markets, but don't expect large buying."
Agrawal feels the profitability of steel companies will not suffer due to low cost structure.
Excerpts from CNBC-TV18’s exclusive interview with Raamdeo Agrawal:
Q: Is the rally sustainable?
A: It is too early to say because after so many days of a sustained downturn, there is a good day of relief. After 7-8 days of major downswing, you get one-day of 600-700 points upmove on the back of USD 8-10 of decline in oil.
But I was speaking to a few people in global fund management and commodity markets. They were saying don’t write-off the oil bulls so early because they seem to have a pretty good grip on oil prices and the producers are also more or less with them. So, it is too early to say that oil is completely off the curve and happy days are here. With respect to the kind of crisis unfolding in the US financial sector, we are yet to go to the worst in terms of write-offs and the challenges that are ahead. So, I would still be little cautious at this juncture.
Q: Do you think any upmove would be more in the nature of a relief rally or a trading rally at this point, not a final bottom?
A: Some stocks stories are actually good, whether in banks or telecom or auto. They should not be treated in the same league as other stocks. Till recently, everything was going down. Whatever you sell, you are right at any price. So that divergence must happen and this particular quarter’s results will also help in that process.
But at these levels in the market, clearly good stocks or great stories must start showing their strength. Firstly, there should be a divergence between a good stock and a bad stock. After that, some kind of broad rally will start.
Q: The only sector that got punished today was metals. What have you made of all the suggestions of a price band for steel and how that might impact the sector?
A: You keep getting conflicting views. Unfortunately, the industry is not a very generic industry. For example- it’s not like steel produced by every producer is of the same type. So, you cannot have price control.
Then, there is lot of value additions and the components are made and then the products are made. So, this is one industry where it is very difficult to actually dictate the price because one producer is integrated for one raw material and the other producer is integrated for other two raw materials also.
So, the profitability of the industry is dependent on scale and the level of integration and things like that. So, it will be very tough for the government to have a sensible price control kind of a mechanism over there.
Their compulsion is to control the so-called Wholesale Price Index (WPI) and there is some national objective to help the government in terms of managing inflation. But I don’t think that eventually profitability will suffer big time because the cost structure is so low for Tata Steel and lot of other companies that they will still make lot of money in the days to come.
Q: How are you summing up the Ranbaxy situation after all the volatility of the last few days?
A: In Ranbaxy, we were very fortunate to do trade on the very first day or second day. But the way, things are opening up now and suddenly this US FDA inquiry is being given so much prominence, which was not there till the deal happened. Suddenly there are things that were not there in the picture. Whether the media is playing too much out of that or not is not clear.
Actually, even the US FDA is getting much more sensitive because the deal has happened. But somehow there is too much attack on the current deal. Going by whatever we have been hearing from the management and what we can read in the terms of the deal, the probability of the deal going through is far higher. I would put it more at like 80-85% than the deal not going through.
In any case, at Rs 440-450 whether the deal is going through or not, fundamentally it is a reasonably good buy.
Q: Do you still think that there is much more to go by way of time before this bear market gets over?
A: Yes, it looks like. There is still life in the bulls where there is one little excitement and people come and pull the market big time. Look at the severity of the problem in the US markets and what it can do to the global situation. It is just about six months since we saw the peak. Probably, this will be the year when you will see the top as well as the bottom.
So, in terms of declines, even at Rs 950-1,000 EPS and current valuations of about 12-13 times, we are done in terms of the bulk of the decline. Day before yesterday the markets were down almost 5%. If you look at the actual total market cap drop, it was less than 2%. There is a lot of noise and excitement in terms of the market going down and the actual damage is much less in terms of the decline in the prices of the broader market.
So, there is some stabilisation happening in terms of valuations. But I would not think that suddenly buying will emerge and we have created a bottom. There is still some more time there.
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