Modi reached Delhi. Investors reached nowhere.

The business newspapers and the business TV channels are making huge noise about Modi wave sweeping the stock market.

When we are reading the news that says Sensex made record high today, we think Indian investors are investing to rise the stock market indices. In reality, the average Indian investors (known as retail investors) are selling and Foreign Institutional Investor (FII) are buying heavily. Does’nt it mean, the average Indian investor has less confidence in Modi Government than FII ?

What type of investor will sell ?

Those who think they got the right price for the stock and those who think the prices are at peak and only the way the prices can go from here is down and not up. The skepticism of the investors are clearly visible in the market.

FII did not vote for Modi, the Indian investor did. As a voter, this investor decided to bring Modi to power and revolutionize Indian economy and create reforms. But as an investor, he wants to take his profits off the table !!

So, here is the voter cum investor who thinks good for the nation but bad for his portfolio. I could not understand this anomaly. Why the optimism of the voter did not translate into actions in his portfolio ?

This short term profit taking mentality is what makes the investor lose in long term. Looking back they always sulk at their decisions.

Here is table of expectation of well known analysts for the Indian Stock Market for this year. (Table courtesy: TOI 20-May-2014)


On 11th May, 2014, I was meeting with our investors in Bangalore. It was a fantastic session. Most of the attendees had questions about the outcome of the election (election results were published on 16-May-2014) and what an investor need to do about it.

My message was this. Just because Nifty is at the same level as in 2010 peak, it does not mean we are over valued as we were in 2010. Lot of water has flown under the bridge in last 4 years. Corporate earnings have grown very much. We need to re-evaluate the indices with valuation parameters.

Date Index P/E P/B Div Yield
5-Nov-2010 6312 25.6 4.0 1.00%
7-Nov-2014 6650 18.5 3.18 1.43%
Discount 38% 26% 30%

Looking at the valuation parameters it is clearly visible we are about 30% down from 2010 levels.

Challenges to Modi

  • Modi was CM but never PM, require different experience and national outlook.
  • He is inheriting bad govt, bad economy, balance sheet from UPA.
  • Inflation is still high. RBI doesn’t seem to be convinced in reducing the interest rates. Raising capital for new projects or investment by corporate still is a challenge.
  • Supply side should improve to bring down the inflation. Reducing Demand by throttling the capital can’t solve the problem alone.
  •  El nino effect – australia weather forecast, recent RBI notifications are worried about possible El Nino affecting our monsoon. Bad monsoon, can negatively affect the prices and thus inflation.
  • Actual growth drivers for economy are SME (Small and Medium Enterprises). SME find it difficult to borrow. Their debt burden is still high.
  • Manufactures have expanded their capacity during last boom cycle and this excess capacity is under utilized now. This has a fixed cost to business. When economy expands, this excess capacity need to be utilized first before new CAPEX. Capex may be delayed.
  • Due to higher Non Performing Assets (NPA), lot of capital has been tied down in several real estate and infra projects. Unless clear government policy is drawn, the projects are not going to be completed quickly. Only then locked capital can be returned to economy for new development.

Possible Investor Actions

  • Since interest rates are high, investor can expect high deposit rates. Bank FD and Debt mutual funds, FMP will rule the investments. Keep an eye on the after-tax yield.
  • All loans will be dearer. Choose your loans carefully.
  • Real estate – project delays are expected, go for completed apartments, for own use. For investments, go for land purchase.
  • Equities – even if there is euphoria now, correction is possible after few weeks. Market takes some time to adjust the indices to reality.
  • New govt policies may take 9-18 months to show results, sustained bull run is possible only after that period. Market may run up and down due to temporary FII actions. Expect volatality and price swings. Only way to handle this situation is divide your money and invest over a period of time. SIP is the best strategy for LT investors.
  • Please don’t ever try to time the market. All those sitting on sidelines expecting Sensex to come down from 20,000 to 16,000 are licking their wounds. They will not be able to accept their mistake and come to the market at this level. These losers put their own retirement to risk and affect their kids financial future too. In our broad interaction with clients,  some time we encounter such adamant investors. We learn plenty of lessons from their life and communicate that to other investors to avoid such mistakes.
    [ Question to Reader:
    Do you know whether you are successful investor or not ?
    Who helps you to check your financial health ?
    Do you know if you are on track to achieve your financial goals ?]
  • USD-INR : INR rates are broadly decided by FII/FDI inflow and RBI market actions. In Sep 2013, Indian forex reserve was $275 billions, now it is around $310 billion. The INR/$ rate has dropped from 68.83/$ to 59/$. Currency will be range bound between 57-63.
  • IT and Pharma stocks may possibly see bad period due to INR appreciation reducing their profitability.
  • Gold : we continue to advise reduced gold purchase. The gold price in India is not aligned with world market price due to artificial government hurdles. They are expected to be removed; when it happens, Indian gold prices will get aligned with world market prices which are lower. Further if INR appreciates, that will also have negative impact in gold prices in India.

Possible actions – USA

S&P 500 p/e is 18.74, div yield = 1.93%
– Small cap index IWM p/e=28.7, 1yr =20%
– Small cap value IWN p/e=25.5, 1yr =20%
– Large Value IWD p/e=20.5, 1yr =20%
– Large shows bit of over valuation but not very high
– Small index shows high valuation, time to sell/reduce holdings
– Continue to invest via DCA
– Hold no gold in US$
– Bonds continue to be risky due to tapering effect

[PS: Most of these information is already shared in the Bangalore meet]

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