Indian Stock Markets – Roadmap for 2009

indianstocksMarkets have corrected about 60% from their peaks and have bounced 30% from their lows.For how long will the markets behave the way they are behaving right now?

What next?
The ongoing worldwide financial turmoil is a creation of years of monetary and financial mismanagement. And it will take some while for these issues to be resolved. There simply seems to be no end in sight and no safe place to hide.In fact, given that the issues will still take time to resolve, do not be surprised if stocks continue to slide from their current levels.

However, shares of companies with solid businesses and visionary managements at helm have been punished as badly as shares of companies with doubtful credentials. The former bunch is trading at discounted prices because of the market’s pessimistic mood.As such, if you decide to buy these quality stocks today, you will be more than pleased in a few years from now.

Will India be able to brave a global slowdown?
India today is a part of the globalized economy and as such, will be impacted by the turmoil that is global in nature. On the contrary, the fact that there are multiple engines of India’s growth – rising spending on infrastructure and consumption – and also the fact that we are less dependent on the western world for our GDP growth gives us confidence that the economy will be able to whether the downturn in a better manner.

Large-caps? Mid-caps? Small-caps?
The allocation of large, mid and small cap companies in an investor’s portfolio must be based on several factors. This includes the investor’s age, risk profile and investment tenure. Higher allocation to large and mid cap stocks is best suited to investors belonging to the middle age category and with a lower risk profile, higher allocation to mid and small cap stocks is best suited to investors belonging to the younger age category and with a high risk profile. However, it is important to make sure that a single stock must not form a large chunk of a portfolio. Generally, a stock should not form more than 5% of one’s portfolio. The portfolio, as a whole, should be well diversified.

Should I buy now? Or wait for the bottom?

An analysis of the history of the stock markets has revealed that different bear markets have bottomed out at different times and there has emerged no definitive trend on the same. Hence, an attempt to time the market or in other words, waiting for the markets to bottom out and then start investing is not likely to prove successful. Efforts should be made instead to look for stocks that are trading well below intrinsic values and then waiting patiently for as much as 3-5 years for the market price to converge with the intrinsic value of the stock.

Should I sell now?

‘No’ if the stock of a company, which has the capability to deliver value in the long term.
‘Yes’ if you believe that you made a mistake in the first place. And there is no point buying more of a troubled company at lower prices just to average your cost. Ultimately, the decision to ‘sell’ a stock should not be determined by the market sentiments but by the investor’s assessment of the valuation of the stock.

All stocks are cheap. So which all should I buy?

The intrinsic value of any asset, be it stocks, bonds or real estate is nothing but the discounted value of cash flows that can be taken out of the asset from now until eternity. This method of valuation is popularly known as the DCF method. Hence, the DCF analysis should be performed on stocks that the investor considers cheap and consider investing in those that give the maximum upside with respect to their market prices.

However,future cash flows are a function of factors like the company’s balance sheet, its management and most importantly, its competitive advantage. Hence, these factors need to be carefully evaluated while arriving at the future cash earnings of the company and thereby its intrinsic value.No matter how attractive the opportunity, it pays not to resort to leverage and don’t buy on borrowed funds as well.

Watch out for the STOCK WATCH section.

And lastly one can have an exposure to gold in one’s asset allocation limited to just around 5% of the total assets,which would be a very good hedge against inflation.

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