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Indian economy is a growth story which can easily go on for a minimum 10 years at an annual growth rate of 7.5-10%. This period is an enormous opportunity of earning through investments in equities. An investor is primarily concerned about the safety of his investments and maximizing his returns. These two are contradictory to each other, for high gains go hand in glove with high risk. However, a return of 20-25% per annum on your investments in equity markets is a reasonable expectation at little or no risk provided one follows the basic principles of investment elucidated below:

• Invest in companies whose P/E lie within 50% to 150% of overall market P/E with EPS of Rs.5.00 or higher for the last three consecutive years and a market cap of at least 1000 crores.
• Always have a diverse portfolio of 4-5 sectors with 2-3 companies in each sector.
• Be with market leaders of a sector.
  

In a large list of sectors such as oil & gas, energy, engineering, textiles, information technology, sugar, construction, infrastructure etc., it is important to make the right choice of preferred sectors.

Presently avoiding IT, textiles, exports etc. because of likelihood of rupee appreciation and slowing down of developed economies, is advisable. Shunning cement, oil & gas, sugar, fertilizer stocks is sensible as they are subject to government controls.

Infrastructure, power, construction, capital goods are the engines of growth and should be high on list of preferences. Real estate sector has been lagging behind all these years and is due for a lot of catching up and will grow at a rapid pace.

With crude prices rising and limited resources of all conventional energy sources, alternatives like wind power, solar energy, ethanol etc. will be in great demand. Investments in virgin fields of Logistics, Retail, Healthcare and Health insurance have stupendous growth potential in the coming decade. Prosperity will fuel up demand for banking, consumer goods, hospitality, tourism, media and entertainment industries.

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Unfazed by the stock market volatility, leading financial institution Macquarie says 2008 could still turn out to be a great year for the Indian investors, who should stay put.

“India is now too important a market to ignore and we recommend investors to stay invested in the market. We think that 2008 has the possibility of being a great year for the Indian market,” Macquarie said in its first edition of Asia Equity Guide 2008.

The Sensex has slipped 4,000 points within a gap of two months taking global cues. Rise in crude prices, a fear of recession in the US and large-scale selling by FIIs had contributed to the fall.

“We believe that India will be in a sweet spot in 2008, with strong growth accompanied by falling interest rates. India is also a strong relative play on the global growth slowdown as it is relatively more immune than most other countries in Asia and earnings’ risk are isolated to certain sectors,” it said. Moreover, India is more isolated than other Asian countries with exports only 15 per cent of Gross Domestic Product (GDP).

Macquarie said that ahead of elections, scheduled in the first quarter of 2009, some sectors could be negatively affected by ‘election inertia’, at the same time, some sectors would benefit. “We believe that careful stock selection will make India an attractive market in which to hide from the global turmoil,” the report observed.

“We think the best play on the elections is the infrastructure and capital goods space, as the Government races to finish projects ahead of the pools. Our top picks in the country are, therefore, DLF, Reliance Communications, HDFC Ltd, Tata Steel and Reliance Industries,” it said.

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Much to the fear and embarrassment of the UPA government, inflation rate almost doubled during the three months of 2008 to reach the 39-month high mark of 7 per cent. Although 2008 began with inflation rate of 3.79 per cent for week ended January 5, prices rose as the year progressed.

Such a sudden spurt in prices has thrown the household budget of the common man into disarray, putting pressure on the government and the Reserve Bank to take steps to control the inflationary pressure.

What is Inflation exactly?

Inflation is a measure of rise in general price levels of goods and services. Inflation is measured by taking a set of goods and services, and then the prices of the items in the set are compared to prices one time period ago.

In India, inflation is measured based on the wholesale price index (WPI) which measures the change in prices of a selection of goods at wholesale prices. Inflation is primarily of two types - Cost push and Demand pull. Cost push inflation is due to rise in costs of input materials or labour, whereas demand pull inflation is due to increase in demand beyond installed capacity.

Inflation comes in many varieties. The worst variety, from the viewpoint of politicians, is food-led inflation. In a poor country like India, where half or more of family spending is on food, rising food prices spell electoral doom.

Inflation went up quite a bit in the beginning of last year (around seven percent) due to high liquidity in the markets (huge funds inflows in the form of FII and FDI). The RBI controlled inflation by tightening the monetary policy (raising cash reserve ratio and interest rates) and letting the rupee appreciate against foreign currencies. Inflation came well within the control limits in the second half of last year. However, inflation is going up again this year from the last few weeks. This week, inflation figures reached the 7% mark. The reasons of rising inflation this time are quite different from those last year.

What are the effects of inflation?

Controlled inflation is good for the economy as it increases motivation levels of people. The government, in consultation with the RBI, decides the inflation threshold in the country (current inflation threshold range in India is 4-5 per cent). The inflation target is one of the key parameters that go into determining fiscal and monetary policies.

When inflation accelerates, as is the case today, governments across the globe tend to panic and rush out with anti-inflationary packages. The government is panic-stricken today because food prices are going through the roof. Overall, wholesale price inflation has accelerated from 4.5% in January to almost 7% today, and looks headed for double digits. Consumer prices are rising even faster because of consumer panic. The consumer price index is available only with a lag of two months, but newspaper reports suggest that in some cities the consumer price of rice is up 20%, edible oils 40%, dairy products 12% and some pulses 20%.

Life in the four metros across the country is getting tougher for poor and middle class consumers as their budget for grocery and other food items have shot up by almost 40 per cent in the last one year, with Delhi being worst hit. The maximum surge in food prices was witnessed in the national capital, followed by Kolkata, Mumbai and Chennai.

What are the main reasons behind rising inflation? Continue Reading»

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All human instincts are guided by the greed to earn more in quickest possible time span and various asset classes such as equity, commodities and real estate are the means to achieve such goals. Equity markets are generally a preferred mode because of possibility of investing in small amounts and easy liquidity.

Equity has its own risks and pitfalls made worse by experts, analysts and tippers guided by their own interests in the market and what a particular management would like them to say. Let us take the most recent case — when the market was at approx. 21,000, no one said that the market was over valued or there were excesses in the market. In fact, there were talks of market touching values of 30,000 and above and recommendations based on these projected values made investors pour in more money into the market. Now, all experts say that the market was grossly overvalued and had to correct. The same holds good for the IPO market. A recent case in point is that of Reliance Power. Before the IPO’s closing date, no expert said it was grossly over-priced. In fact, all along premiums of Rs 500 and above were being talked of. Was it for the good of investor or management or some High Net Worth Individuals? The naked fact is that about 70% of IPOs ultimately sell below their issue price for many, many years.

Let us be clear about one thing. The markets, experts, tippers and brokerages thrive on the Retail Investor for their shear numbers and accompanying investing capacity but work for company managements, HNI’s and organized sector of bulk investments which at best could account for 35-40 % of total market value. In every stock market boom, be it Harshad Mehta’s time, Ketan Parekh’s time or the recent one, more than 75% of the retail investors perish but in a nation of 1000 million, a few million newcomers appear after a gap of 2-3 years.

Does it mean that equity should not be considered as a means of earning money. No not at all. But one has to learn take one’s own decisions after considering both the speculative content and fair value appreciation content of the script under consideration. Dealing in equities with higher speculative considerations is a very risky approach and I am sure you would not like to be the unlucky buyer at peak of a boom for your buys may not be the favoured ones in the next up cycle of the sensex and you may end up with 75% erosion of your wealth.

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Its been a sorry state of affairs for global stock markets in 2008. All major market indices in the world have corrected significantly from their peak levels. The indices in India (Bse and Nse) crashed over 30 percent from their peak levels.

Negative investor sentiments, high interest rates, rising subsidy bill of the government (specially the fuel subsidy and agricultural loan waivers), cautious outlook projected by some large corporates, and elections due at the end of 2008 did not help the Indian markets.

The global markets (esp. US) plagued by negative sentiments and news flows related to the US sub-prime crisis, weak US economic data (job market data, property prices, and consumer purchase data) and the views and predictions of a slowdown in the US economy. Analysts feel this was bound to happen as the trading deficit of the US was on the rise from the past many years and it has reached USD 760 billion in 2006.This means a deficit of two billion dollars every day. This huge trade deficit triggered depreciation of the US dollar against all major world currencies (euro, Japanese yen, Canadian dollar, British pound etc).