PREPARE DON’T PREDICT

In the past few days i have been asked by various investors as to my Nifty and Sensex targets for the next 5 years now that we have a new government at the centre. I for one am at a loss to answer that since there is no accurate way of forecasting the future. The whole financial media juggernaut has gone to town giving year-end targets and recommendations. Investing is not about going to a soothsayer (adviser) who can accurately predict the future. If one delves into the past there have been umpteen instances of inaccurate forecasts. Yes there have been people who have predicted the dot-com bubble in 2000 and the credit crises in 2008 but they have been few and far between, moreover in the economic forecasting business there is always someone who gets it right but it is rarely the same person. Trying to predict the future is like predicting the weather and we all know how those forecasts play out. I think there is enough information available in the present tense and investors would do well to analyse this and invest on the basis of the present tense than try to do crystal ball gazing. That is enough ‘gyan’ for this post so in short what investors can do is to ‘prepare’ instead of predict. The best way of preparing is to invest in an ETF (Exchange Traded Fund) since it is a graded investment approach and since nobody can accurately forecast, it ensures that the investor has a foot in the door at all times and is one of the best ways to play what is now popularly referred to as the ‘Modi Trade’.  Why ETF’s, the reason is that at the click of a button investors can buy or sell whole portfolios of assets that were difficult or  expensive to obtain. ETF’s have supplanted mutual funds as an instrument  for passive investing all over the world and the same is happening in India as well. There are 6 ETF’s which can be bought into at the present and the best part about this approach is that you can start any time since it is a graded investment plan, moreover since nobody can predict the future this approach ensures that one puts away a fixed amount every month into Equity as an asset class. There is however one drawback and that is that it is a boring method compared to active investing but for investors who follow the approach religiously and diligently the returns are outstanding. Also unlike Gold the ETF’s are dividend paying instruments. The unfortunate part is that it is not widely known that all these are traded actively, the available ETF’s are:

* The units represent 1/10 Th or 1/100 Th as the case may be of the underlying index.

** Tracking Error : this is the measure of how closely the portfolio follows underlying index to which it is benchmarked.

***  Click on the ETF Name to get the constituents and weight-age as on 30 April, 2014.

MARKET WEEKLY

“Over the years, I’ve become convinced that fluctuations in investor attitudes towards risk contribute more to major market movements than anything else. I don’t expect this to ever change.” – Howard Marks

The above statement correctly sums up what we are currently witnessing on Indian bourses. It was a momentous week for the Indian stock market with practically every stock in the mid and small cap segments showing handsome gains. The market has a great ability to humble human beings with the result that even the perma-bulls ended the week with a sense of having been left out of the run. Putting that into the correct perspective if an investors portfolio was up 25 % for the week that was not enough. Incidentally ‘Modi Mania’ has propelled India into the world’s 10 biggest stock markets by value for the first time, surpassing Australia. The total market capitalisation of Indian companies has jumped 25 % this year in dollar terms. The sheer momentum and magnitude of the up move in some stocks took all participants by surprise, the following shows the best weekly gains across sectors.

It has been a very long time since this kind of mass euphoria has been visible on Indian bourses and most investors are tempted to join the gravy train lest they miss it.  In fact I had a number of investors grumbling that they should not have sold last friday and another set of investors stating things which effectively meant that ‘this time it’s different’. It was a week of forecasts, the Whatsapp engine was working overtime with announcement of the cabinet, change in RBI governorship, PSU divestment etc. In the longer term markets move on the gap between expectations and reality and markets are known to be counter-intuitive. The message from the markets is clear: India has a new game, pay attention.

MARKET TIMING

There is a market timing ratio that has historically worked well, the reason being that it is not very widely popular and is not talked about by the media, hence the fact that it is not commonly discussed makes it more effective since as i have said in the past tendencies tend to stop working once they are widely discovered and emulated. In the emerging markets space this ratio has historically shown to have some predictive power. The tool expressed as a percentage is the ratio of

AGGREGATE MARKET CAPITALIZATION

OF PUBLICLY TRADED STOCKS

——————————————————————    X 100

COUNTRY’S GDP

The aggregate market capitalization is the total rupee amount of the market capitalization of publicly traded securities and GDP is the total rupee amount of the goods and services produced within India. A ratio above 1 or 100 % tends to indicate that the market is overvalued.  The current ratio and the historical data at different times in the past is shown below (figures are Rs. in crores) :

The logic behind this metric is that the country’s stock market should not be bigger than the country’s GDP and if it is then it points to an over valuation which is a sell signal. A corollary of this is that at times it may mean that the GDP is going to rise faster and the market has run ahead of it. In such cases the market may not be a sell. As is visible above the ratio was in excess of 1 in the year 2008 when the last top was made and currently it is at about .70 or 70 %. However the data presented is as on 30 Th April and the market has risen around 8 % from those levels so currently we should be at around .75 or 75 %.  Incidentally the comparable ratio for the U.S. market is 1.15 i.e. about 115 %.