Friday, 25 October 2013

Play The Cyclical Markets - Pick Stocks For A Lifetime

If somebody were to sum-up the present macro-economic situation in India, they would probably sum it up as High Inflation Low Growth. As the IIP data for the past 12 months and the dismal GDP numbers reported so far and projected for the full year show, we are going through an economic low presently. But, for investors should search  good opportunities for investment in the present situation too.

The Economy At Present :

To make good of the present economic situation too, we need to understand what’s going on clearly which will eventually help us in making good investment decisions. The following are some pointers to gauge the current situation and help us find good investment avenues.

  • The high inflation scenario has given rise to high interest rate regime as the RBI is clearly giving more importance to curtailing inflation at the expense of growth.
  • The govt.’s 10yr bond yield - which reflects the cost at which it borrows from market to fund for welfare programs, govt. expenditure and budget deficits- is above 8.5%
  • In such a situation, corporate establishments are vary of utilising the bond market to raise funds for their capex plans due to the prevailing high cost. 
  • Low investor sentiment has made it difficult to raise funds from equity markets too. 
  • The high interest regime and difficulty in raising funds has led to a liquidity crunch leading to stalling of many big projects by the industries. Many capex plans are at a standstill or lagging behind.
  • In order to reduce the outgo on interest payments, many companies have started to de-leverage their balance sheets. As more amount of revenue earned from business activities is used for this purpose, growth suffers.
  • The effect of low growth is reflected in our low GDP numbers. The IMF has projected a GDP figure of 3.8% for the current financial year. Our own expectations for the current year GDP are in the range of 4.5% to 5.5% which is a far cry from 8% to 9% which we enjoyed earlier.
  • Financial sectors are facing the direct heat of low GDP growth. The rising numbers of gross NPA and requests for CDR are indicators of loans going bad. 
  • 60% of FII investments are limited to about 20 stocks in order to shield them from domestic factors, liquidity risks and side effects of upcoming elections.
  • Companies are investing abroad to explore opportunities for business growth as conditions in India are not conductive. At a recent interview L&T disclosed that 25% of their revenue is coming from outside world. 

Conclusion :

We can easily see that the economy is going through a low ebb in its cycle. In the present state, sectors like IT, pharma and FMCG are attracting more frontviews because of their ability to sustain growth with clean cash flows. These sectors are thus fetching high valuations. On the other hand sectors like cement, capital goods, auto, construction, power, banking, metals etc are presently not in the limelight but will catch up the investors’ eyes when a cyclical reversal takes place as they represent the real economy.

Thus, now is the time to pick your stocks carefully. Now is the time to build upon your portfolio of good investments. Investors should utilize this time to be more choosy in picking valuable and long lasting stocks. Sectors like IT, pharma and FMCG on account of their presently high valuations carry an inherent valuation risk for the future. Other sectors as mentioned above may not be the flavour of this season, but they represent the real economy and should be used to create long-term positions now. Investors can keep an eye on the leaders in their respective sectors for opportunities to invest.

The present economic dullness has prompted many to move away from the craze of equity and think about a wholesome financial plan.This situation can also be used to build upon a total financial portfolio which is balanced in nature and which can shield us financially throughout our life. Equities, nevertheless should be a prominent part of any such portfolio built.