Sunday, December 30, 2012

Overpriced stocks may dampen 2013

My Column for Deccan Chrnoicle - 30-12-2012. A peek at 2013-- The year 2012 surprised the faithful flock of investors. A 20 per cent return was delivered twice over during the year in the backdrop of so many worries and global turmoil. The first two months and the last two months rewarded the brave with handsome returns. Global investors gave a resounding vote in favour of Indian equities, investing a record amount of nearly $24 billion in equities. Even when our economy was growing at nine per cent, we did not get this kind of inflows. Perhaps the rule of restricted choice made India the best choice in this distressed world. At the end of it, we have a market near 20,000 points on the BSE. The general opinion on the street is positive, unlike the previous yearend. Each year, people generally get wiser with one more year of experience under the belt. This is true for all, except for folk like us who invest in the stock market. For us, each year is ‘different’ because we have discovered a new reason to be in the market. We have come to a turn where all the quality stocks are extremely pricey. Investing in them now, is unlikely to give us any returns that will help us beat inflation. If there is going to be a rally in the market, it has to be solely on account of the cyclical sectors rallying. We also head into the last full budget of UPA 2, which means that the first six to eight weeks of 2013 could give us a lot of returns based on expectations. If one is unsure about which stock or sector to bet on, the wise thing to do will be to tank up on the index. Going by my logic of quality stocks being expensive, it means that the rally should mainly happen in metals (beats reason, but it could rally), PSU Banks (we are never short on hope), infrastructure (blinded by passion rather than reason) and capital goods (we never learn). We spent the whole of 2012 waiting for the RBI to cut interest rates. Will RBI do it in 2013? The noise on the street says, yes. We could witness a cut in the first quarter itself. If so, it will give a boost to the market and the banking stocks will again rally. It is interesting to note that most of the ‘diversified’ large cap funds have 20 per cent or more in the banking stocks and we also have half a dozen banking sector funds. And the government has promised to infuse Rs 15,000 crores more in to PSU banks to make them have a modicum of respectability. If interest rates are cut and the bond prices rally, there is cheer for the fixed income investors. If there is a one per cent cut, I would then exit half my positions in fixed income and shift to equities. Maybe I will start the move now itself, without waiting for the actual cut. This is because the equity markets would rally in anticipation rather than wait for the event to happen. Similar to Rip Van Winkle, the UPA 2 woke up sometime this year. They have pushed through a half-baked FDI policy for domestic retail and have promised a massive vote-catching direct cash transfer. All of this gives an impression to the market of a government that is committed to ‘reforms’. The year 2012 ends with equities back in fashion (albeit with a dramatically reduced domestic retail participation), gold in negative territory for the first time in eight years and fixed income remaining rock steady. This year also taught us the importance of staying invested in equities, unless one is a master at timing the markets perfectly. Gold, whilst intrinsically worthless, continues to reflect the fear of governments and the strength of the dollar and has to be a small part of a large portfolio. For the retail investor, there would be some opportunities to make some loose change from flipping in some PSU IPOs as the government will push some disinvestment through at some discounts to market pri-ces (not saying that market prices are right or wrong, but there could be some upside in the issue pricing) and the government-owned investors pump in moneys. Budget expectations would start, with infrastructure, government-owned oil companies, fertiliser companies, etc, would hog the limelight. Usual suspects like housing, finance, banks, real estate etc would also have their moments under the sun. As per Chinese calendar, 2013 is the year of the Water Snake. It sounds dangerous, but not poisonous. Have a great year

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