LoanRaja Blog- Personal Finance Guide

2009- This New Year Invest Wisely!

As an investor, you would be tempted to pick your stocks in the current downtrend. This year, you need not rush as markets are unlikely to stage a recovery for good part of the year.

Come New Year, it’s time to wear the thinking cap for investments. One of the good things about the current New Year is that expectations are at the bottom and hence, investors are happy to protect their capital than bracing up for high returns. While investors are being warned about the current downtrend and a prolonged bearish mood for equity and other markets, the message for the common man is, go slow on investments.

The outlook for 2009 depends on the following factors: India going or not going for a war with Pakistan; Easing of the cost of funds for industries by mid-year; the outcome of elections in May; Plans by companies for nuclear energy production using Indo-US civil nuclear deal; continuation of oil prices at current level.

As you would have noticed, the year 2009 has the potential of facing different kinds of risks and as a result, we should not expect great surprises or multi-baggers in 2009.

In a nutshell, we can zero in on the best investment strategy in the following way. If there is war, it is better to focus on sectors such as Telecom, Hospitals, Engineering and IT companies in the Geo Spacial Technology. If there is no war, it is better to focus on Telcos. In all scenarios, we can focus on pharma and healthcare companies, Office automation equipment, and Personal care sectors.
Irrespective of the choice of sector, this is not an year where you can pick your stock and stay invested for long. On the other hand, review of portfolio is a necessity and in fact, take a good look at your portfolio at regular intervals. The first such review should be made after the General Elections which could be around May-June.

In the second half of 2009, try infrastructure and housing companies as the prices will bottom out by mid-year. In metals, one can try steel and aluminium companies in the second half of the year as the input costs will settle at lower levels and new government would be coming out with infrastructure plans. The same logic also applies to capital goods sector but enter only after June.

So, the forecast for 2009 is very clear. A dull market is ahead and if you are thinking of any windfall opportunities, you can keep yourself miles away from the market throughout the year and take a long holiday from the market.

On valuations front, the P/Es (price-earning) of Sensex has come down to 11x. This is the lowest level of P/E post 2000. Some analysts feel that the current P/E level has even discounted the realities of coming three quarters. Though this level is considered by value investors as good entry opportunity, it is better to wait till good trend reversal is clearly visible. This may come in the fourth quarter of 2009 or may not come depending on the market situations at that time.

In IT sector, companies such as Infosys, Wipro and TCS are sitting on huge cash reserves. In recession, generally, companies with huge cash balances will plan well for future and get ready to encash the rebound in market whenever it happens. These companies will use these cash reserves to strategically buy companies abroad or for inorganic growth. They may also plan to diversify their product or service offerings.

Individual stocks to watch in 2009 are: RIL, RPL, Reliance Communications, Bharti, Idea, SBI, Rolta, HDFC Bank, Patni, Tech Mahindra, Jindal Steel and Power, IFCI, Hindustan Zinc, Sterlite Industries, BHEL. In addition to these companies, investors can also watch sugar and cement companies located in South India as they have locational advantages.

Interest rates more volatile? Rate cuts have become a regular affair but the consumer and banker is not enthused about borrowing or lending. Both need a bigger push from the government
In recent times, interest rates have turned more volatile than equity markets. Not surprising considering the fact that there is talk of a rate cut on a weekly basis. It is the expectation of these cuts which is keeping the Indian market swing in a wide range. If you look at some of the other global markets, the volatility in interest rates is not exciting for traders. Now, will we have a rate and if it comes through, will it get us out of the current slowdown which is all around us?

In fact, many have been complaining that life hasn’t changed in a big way after the recent rate cut which has pushed banks to cut down interest rate by 0.75%. The crib is that home loan rates are still in double digit and well above the comfort zone for many. As a result, borrowers are not exactly rushing to banks for buying property or cars.

If government is thinking of another cut in interest rate or stimulus package, it is due to the non responsive behaviour of the consumers. However, for the consumer, the problem is not merely on the rate front. In the case of property, developers are unwilling to press the price revision button having created land banks during real estate boom. As a result, you still find the property prices on the higher side as the developer is not ready to offer a discount of more than 15-25% in interest rate. In the case of cars, the story is entirely different.

So who need not worry about interest rates? Car manufacturers have been faced with the challenge of rising inventory and have begun to lower prices but the consumer is not ready to bring in a new car in a hurry. The reasons for lack of enthusiasm are plenty but top among them is the uncertain future. If the salaried is not sure if he will have the same pay cheque for the next one year, the uncertainty is of a different kind for the self-employed who account for a good chunk of car buying population at this time of the year. For these entrepreneurs, receivables are mounting and cash is turning out to be a rare commodity. With the economic recovery threatening to take more time to return to normalcy, the entrepreneurs are not in a hurry to invest on new wheels.

It is in this background one has to view the economic packages being unleashed by the government. In an election year, the government is keen on reviving the sentiment which has taken a huge beating. The uncertainty, liquidity crunch and the lack of enthusiasm among consumers to loosen their purse strings is not having the desired impact and hence, the Union government has been pushed to get more aggressive with its goodies. That’s why now you hear about income tax sops on home loans, higher investment limit for Section 80c and there is even talk of the government pushing builders to offer steeper discounts. Banks have already been told to get back to lending rather than focus on government securities. In the past few months, banks have resorted to increased scale of treasury operations. Not surprising considering that government securities have become the most profitable option for improving bottom line. The focus on treasury has been an easy option for banks in an era of falling interest rates. As you are aware, the yield from government securities goes up in inverse proportion to the prevailing interest rates and the sharp fall in the last few months has helped the yield to be in the range of over 15%. Unless there is pressure on them to get back to lending, banks may continue to rely on treasury profits for their good health. Only government has the wherewithal to push them.

There has been a flood of guaranteed return options from insurance companies but check out whether it meets your long term needs. Wealth creation needs more money and period through fixed return products.

You just need one year of weakness in equity markets for investors to rush for guaranteed returns. Forget the investor, even product manufacturers (your mutual funds, insurance companies and the like) are rushing in with structured products which offer the comfort of fixed returns. While downtrend is the best time to accumulate in an equity market, investors invariably end up looking at debt during the downtrend and vice-versa.

Now, take the case of two leading insurance companies which have come up with guaranteed returns on their insurance schemes. While LIC has launched Jeevan Aastha, a fixed return product, ICICI Prudential has launched a fund, RGF, with the buy-back option of first year premium on four of its schemes. In the case LIC, the product is one-time premium and comes with tenure of 5-10 years. The product offers guaranteed return and loyalty return and the effective yield is projected to be around 9%. Since the product also comes under tax saving option under Section 80C, there has been an unusual rush among investors for the product. The product is being pitted against fixed deposit which is far less tax efficient because of tax on interest income. Interestingly, the pamphlets of insurance advisors project the superior benefits of the product vis-a-vis FDs and hence, investors have been made to believe that the insurance plan offers superlative returns. In fact, some of the advisors on the blog claim an annualised returns of 17% for the scheme!

Countering LIC’s plan has been ICICI with its latest fund, RGF (return guaranteed fund). This fund, which is more of a feature for four of its insurance schemes, offers a guaranteed return of slightly over 8%. The company promises to buy-back the first year premium at an NAV of 15 after five years from the date of investment. If the NAV happens to be higher than Rs 15 at the end of five years, the actual NAV would be applicable for the investor.

If an investor signs up for an insurance policy for a term of five years, he has the option of choosing for RGF for first year premium and can opt for change of fund for the remaining four years of premium paying period. The investor, however, need not worry about the choice of fund immediately and can take the call on investment option at a later date. The basic idea behind the fund is assuring the investor of returns in a year where equity has proved to be volatile. With the coming year too being expected to be volatile, the investor may feel comfortable with guaranteed return products.
Suitability: the assured return products are suitable for risk-averse investors and for those who are looking at the prospect of protecting returns. Hence, investors who are looking at parking large sums in the first year can opt for such products. On the other hand, the product may not serve the purpose for young investors as they need to look at options which have the potential of creating wealth. With guaranteed returns, either it would take longer time or investors will have to park larger sums for building wealth. More importantly, equity is closer to its three year bottom and chances of equity providing single digit returns from current level is limited. For instance, even at current market levels, five year returns from equity outperform debt products. Take all of these options keeping in mind the risk-reward ratio which is loaded in favour of equity at present.