Dear fellow investors,
This should help in clearing some of the jargon you come across in the world of investments.
Active Portfolio Management
Is a systematic and proactive approach to investment with the goal of beating the market. This strategy is based on the premise that markets are not efficient and that there is scope to earn abnormal profits through an active investment strategy.
Annualized Return
The return a fund would have generated over a year on a compounded basis. This method is the best indicator to measure the performance of a fund.
Asset Management Company (AMC)
A Company registered with SEBI, which takes investment/ divestment decisions for the mutual fund, and manages the assets of the mutual fund. e.g. for Sun F&C mutual fund , the AMC is Sun F&C Asset Management (India) Pvt. Ltd.
Asset Allocation
It is the process of allocating the overall corpus to different assets like equities, bonds, real estate, derivatives etc.
Back-end Load
A kind of redemption charge that an investor has to pay for withdrawing his money from the mutual fund. It is basically imposed to discourage investors from exiting the fund. It is also popularly referred to as an Exit Load.
Balanced fund
A fund that invests substantially both in debt and equity.
Bottom-up Investing
It is a strategy of selecting the company for investment first and then cross checking it by evaluating factors pertaining to the industry and the economy. It is the opposite of the top-down approach to investing.
Closed-ended fund
A fund where investors have to commit their money for a particular period. In India these closed-ended funds have to necessarily be listed on recognized stock exchanges which provides an exit route.
Contingent deferred sales charge (CDSC)
An exit charge permitted under the regulations for a no-load scheme
Continuous Offer Period
Is the date from which the units are available for sale and repurchase at a price linked to NAV of the scheme.
Corpus
The total investable funds available with a mutual fund scheme at any point of time.
Credit Risk
It is the risk that the issuer of a fixed income security may default on payment of interest and repayment of principal. It is also referred to as default risk.
Dated Security
A debt instrument that is long term in nature and has a fixed date of redemption.
Debt fund
A fund that invests in debt securities like Government securities, Treasury Bills, corporate Bonds etc. These funds are generally preferred by investors wanting steady income and not willing to take higher risks.
Dematerialization
The process of converting the physical /paper shares in Electronic form. SEBI had made it compulsory to get the shares of some companies dematerialized. In this process the investor opens an account with a Depository Participant (DP) and the number of shares the investor holds is shown in this account.
Depository Participant
An authorized body who is involved in dematerialization of shares and maintaining of the investors accounts.
Discount/Premium to (Net Asset Value) NAV
It is the difference between the unit price and NAV. If the price is higher than the NAV, the units are trading at premium: if the price is lower, the units are trading at a discount.
Diversification
It is the investment strategy of not putting all one’s eggs in one basket. By diversifying a portfolio across different industries, overall risk of the portfolio is reduced.
Dollar Cost Averaging
The strategy of dividing the investible amount into a number of equal parts and buying at regular intervals to take advantage of lower prices. This strategy is more beneficial in a bear phase.
Efficient Portfolio
A portfolio which ensures maximum return for a given level of risk or a minimum level of risk for an expected return.
Factor Fund
It is a mutual fund that has a core philosophy of investing in a particular factor or style in the market. They are also referred to as Style Funds. Examples of factor funds are Mid-cap funds, Low P/E funds, Growth funds etc.
Financial Pyramid
An investment plan in the shape of a pyramid structure where the safest investments are at the base and the riskiest investments at the peak.
Fixed Income Security
A type of security that pays fixed interest at regular intervals. These comprise gilt-edged securities, bonds (taxable and tax-free), preference shares and debentures. Less risky than equity shares and have little scope for capital appreciation.
Front-End Load
An initial amount charged by a fund for its administrative expenses or for paying commissions to brokers. If the charge is made at the termination or redemption, it becomes a back-end load.
Gilt-edged Security
Government securities and bonds, usually with a low interest rate. Considered safest investments, as the government security is free from default risk. Originally such certificates were edged with gold and hence the name.
Gilt fund
Funds that invest predominantly in government securities and treasury bills. It is good for investors who desire safety of principal and adequate liquidity.
Go-Go Fund
A mutual fund which invests in highly risky but potentially profitable investments. Such a fund usually has a short life.
Equity/Growth fund
A fund that invest primarily in equities and has capital appreciation as its investment objective
Fund Manager
A professional manager appointed by the Asset Management Company to invest money in accordance with the objects of the scheme.
Fundamental Analysis
A method of investment analysis based on the fundamentals like turnover, net profit, growth, and vision of a company. The boom or depression of the stock markets are not considered in this analysis.
Income Fund
A fund that usually invests in debentures, bonds, and high dividend shares. Preferred by investors who wants regular income. It pays dividends to the investors out of its earnings.
TOP
Index Fund
A fund whose portfolio is benchmarked against a popular index like the BSE Sensex or the BSE Natex. Such an investment philosophy reflects the belief that the market is efficient and trying to beat the market over the long term is futile
TOP
Initial Offer Period
The dates on which the initial subscription to the units of the scheme can be made. It is similar to the IPO of an equity issue. This initial offer period is followed by a continuous offer period.
Interest Rate Risk
The change in the price of a debt security due to changes in the market interest rates is the interest rate risk. For debt oriented mutual fund schemes, this interest rate risk affects the NAV of the fund. A rise in the interest rates leads to a fall in the price of a fixed income security.
Interim Dividend
An advance installment of the dividend finally declared. More often one, but sometimes two such payments are made. The final dividend is often at least equal, and sometimes more. The interim dividend is a fair indication of a company's profitability, during the working year.
Liquid Fund
A fund that invests its corpus in short term instruments like call markets, treasury bills, Commercial Paper (CP), Certificate of Deposit (CD).
Liquidity Risk
It is the risk in a fixed income security as well as in equities that these securities may not be sold in the market at close to their value. Liquidity risk is characteristic of narrow markets like India.
Load
A charge by the fund when an investor buys (entry load) or sells (exit load) units in the fund.
Market Capitalization
Represents the market value of the company. It is a product of the current market price and the number of shares outstanding.
Market Instrument
A fully negotiable instrument for short-term debt.
Market Lot
A fixed minimum number of shares, in which or in multiples of which, shares are bought and sold on the stock exchange. The advent of dematerialization of shares will do away the significance of market lot.
Net Asset Value (NAV)
This is calculated as total assets minus all expenses and divided by the number of outstanding units. This is the main performance indicator for a mutual fund, especially when viewed in terms of appreciation over time.
No-Load Fund
Shares of an open-ended fund, which can be bought directly from the fund without any sales charge or brokerage. US-64 is an example of a no-load fund.
Offer Price
The price at which units can be bought from a fund.
Offshore Fund
A fund domiciled outside the country where investments are made. It is often a tax haven, not subject to the tax laws of the holder's country.
Pari Passu
Ranking equally. After conversion of debentures into shares, the new shares created carry the same rights as the existing shares of the company to receive dividends, rights and bonus shares, and to participate in the company's profit and loss.
Passive portfolio management
Exactly the reverse of active portfolio management. The portfolio manager assumes that markets are efficient and all information is already analyzed and reflected in the prices of shares. This strategy is based on the premise that it is impossible to consistently beat the market.
Rating
Evaluation of credit risk in fixed income securities. This evaluation is specific to the security rated and is done in India by Crisil, Icra, Care and Duff & Phelps.
Record Date
It is the date announced by the company/mutual fund, which is a cut-off date for corporate benefits like dividends, rights, bonus etc. Only investors whose names appear in the company’s registers on that date are eligible for the said benefits.
Reinvestment Plan
It is a plan where the earnings of a mutual fund scheme are reinvested back in the fund.
Reinvestment Risk
It is the risk that the interest on fixed income instruments cannot be reinvested at the same rate. This problem becomes pronounced in a falling interest rate scenario.
Sector fund
Such funds invest only in stocks belonging to a specific industry usually aimed at growth. For e.g. Kothari Pioneer Infotech Fund. Sector funds are generally considered to be risky in nature.
Securities
Financial documents which give the owner specific rights of ownership; these include: equity and preference shares, debentures, treasury bills, government bonds, units of mutual fund, and any other marketable documents.
Sinking Fund
Money regularly set aside in a separate fund and invested by a company for the repayment of debt instruments (fixed deposits, debentures, other loans) or the redemption of preference shares, or for replacement of assets.
Sponsor
Sponsor is the parent organization that contributes the initial capital of the asset management company (AMC). e.g. Kotak Mahindra Finance is the sponsor for Kotak Mahindra Mutual Fund.
Switching
Transferring from one scheme to another in a group of schemes operated by a Mutual Fund, where the rules so permit. A switching fee may or may not be charged.
SWOT Analysis
A type of fundamental analysis of the health of a company by examining its strengths(S), weakness (W), business opportunity (O), and any threat (T) or dangers it might be exposed to.
Systematic Risk
This is the market risk that a security faces and is essentially non-diversifiable in nature. This risk is caused by macro level factors like changes in inflation, interest rates, budget announcements etc.
Tax saving fund
Such funds allow the income tax payees to claim a rebate under the Income Tax Act.
Technical Analysis
A method of prediction of share price movements based on a study of price graphs or charts on the assumption that share price trends are repetitive. Since investor psychology follows a certain pattern, what is seen to have happened before is likely to be repeated. The technical analyst is not concerned with the fundamental strength or weakness of a company or an industry; he only studies price and volume behavior.
Top-Down Investment
An approach to stock selection which evaluates the prospects of the economy first, then the prospects of the industry and then finally the prospects of a particular company to take an investment decision. It is the opposite of a bottom-up approach to investing.
Transfer Agents
Professional firms, now mostly computerized, which maintain the records of shareholders of their client companies.
Treasury Bills
These are bills of exchange, i.e., IOUs, issued by the Reserve Bank of India for short-term loans, 91 days to 364 days.
Trustee
The trustee is the legal owner of the mutual fund. The trustee takes into custody or under its control all the capital and property of every scheme of the mutual fund and hold it in trust for the unitholders of the scheme.
Unsystematic Risk
This is the proportion of risk that is specific to a particular company. This diversifiable risk could arise due to company specific factors like operational factors, financial factors, labor unrest etc.
Value Investment
Investment in shares whose intrinsic value is above their market price. Fundamental analysts often make recommendations of value investment, as they can spot undervalued shares.
Vulture Fund
It is a fund that takes over the non-performing assets of bank or financial institution at a discount and issues pass-through units to the investors.
Venture Capital Fund
A limited company formed to provide venture or risk capital to new industries.
Zero Coupon Bond
A coupon is an interest warrant attached to a debt instrument, and the coupon rate is the rate of interest. A zero-coupon bond carries no interest, but is sold at a discount to its face value, which is the maturity value. The difference between the discounted price and the maturity value represents the interest on the bond.
Monday, January 21, 2008
Saturday, January 19, 2008
US Headed for a Recession. Do We Have to Worry?
Is the United States headed for a recession? Yale professor Robert Shiller certainly thinks so. In a recent interview, Shiller told The Times that the American real estate sector has "trillions of dollars' worth of losses" yet to come, and it could plunge the U.S. into a "Japan-style slump."
But don't tell that to U.S. Treasury Secretary Henry Paulson, who said that "the economy and the markets are strong enough to absorb" rising credit losses. He remains confident that the country will not slide into recession.
Then there's financial newsletter tracker Mark Hulbert, who concluded that "the odds had increased that we were already in a recession" -- and he wrote that in September!
The three wise men
When three experts offer three different opinions, it's difficult to know whom to trust. So here's my advice: Ignore them all.
Seriously, ignore them all
Suppose Shiller's correct, and the U.S. is headed for a recession. Or maybe Hulbert has it right, and we've been in a recession for months. Does it ultimately matter? Should you alter your stock selection process? Should you sell off your stock holdings in favor of fixed income?
Just what the heck is a recession, and what does it mean for stocks? The answers may surprise you.
What goes up must come down
A recession is the period between a peak of economic activity and a trough. Recessions typically last between six and 18 months, and they're a perfectly natural part of the business cycle. A recession does not mean that economic growth has stopped; it merely means that it has slowed down.
To determine whether the economy is in recession, the National Bureau of Economic Research (NBER) analyzes changes in factors such as gross domestic product, personal income, employment, industrial production, and retail sales volume. There is no fixed rule for how the different indicators are weighed.
But there is a significant delay
It takes time for the NBER to collect and analyze this economic data. By the time it's determined that the country is in a recession, odds are that the economy is already close to recovering. For example, the last trough in economic activity occurred in November 2001 -- but the NBER didn't make that determination until July 2003. By that time, the economy had been improving for over a year and a half!
Wait, stocks can go up in a recession?
Since 1945, there have been 11 recessions lasting an average of 10 months each. But according to a recent article from Hulbert, during these recessions, the stock market actually rose seven times -- and the average market return during all 11 recessions was 3%!
Those who ignore the past ...
During the 2001 recession, the S&P 500 fell about 12%. However, this was largely due to the abysmal performance of a few technology companies:
Meanwhile, quality companies with strong balance sheets, solid free cash flow, and shareholder-friendly management actually prospered during this period:
Heads you win, tails you still win
Here's how to silence the noise: Concentrate on finding the types of stocks that will perform well in any economic environment. I advise investors not to try to time the market or forecast the next recession. Rather, I advise that you only invest in quality companies with strong balance sheets, solid free cash flow, and shareholder-friendly management.
And fortunately, thanks to fears of an impending economic slowdown, many quality companies are available on the cheap.
Consider this as an example.
FedEx (NYSE: FDX), currently trading at the lowest price-to-earnings multiple the company has seen in a decade. FedEx has an extensive ground and air transportation network, strong balance sheet, great brand, and significant international presence. And as global commerce grows and the middle class expands, demand for FedEx's express transportation services will only increase.
A temporary slowdown in the U.S. economy would likely affect FedEx's earnings to some degree, but this is a company that generated $9 billion in international sales last year. If the U.S. economy does enter a recession, chances are pretty good that FedEx will survive. However, thanks to the market's irrational fear, today you can scoop up shares of this quality company at a discount to intrinsic value.
The above applies to even Indian companies and with BSE Sensex at 19000 now, many are available at reasonable valuations.
But don't tell that to U.S. Treasury Secretary Henry Paulson, who said that "the economy and the markets are strong enough to absorb" rising credit losses. He remains confident that the country will not slide into recession.
Then there's financial newsletter tracker Mark Hulbert, who concluded that "the odds had increased that we were already in a recession" -- and he wrote that in September!
The three wise men
When three experts offer three different opinions, it's difficult to know whom to trust. So here's my advice: Ignore them all.
Seriously, ignore them all
Suppose Shiller's correct, and the U.S. is headed for a recession. Or maybe Hulbert has it right, and we've been in a recession for months. Does it ultimately matter? Should you alter your stock selection process? Should you sell off your stock holdings in favor of fixed income?
Just what the heck is a recession, and what does it mean for stocks? The answers may surprise you.
What goes up must come down
A recession is the period between a peak of economic activity and a trough. Recessions typically last between six and 18 months, and they're a perfectly natural part of the business cycle. A recession does not mean that economic growth has stopped; it merely means that it has slowed down.
To determine whether the economy is in recession, the National Bureau of Economic Research (NBER) analyzes changes in factors such as gross domestic product, personal income, employment, industrial production, and retail sales volume. There is no fixed rule for how the different indicators are weighed.
But there is a significant delay
It takes time for the NBER to collect and analyze this economic data. By the time it's determined that the country is in a recession, odds are that the economy is already close to recovering. For example, the last trough in economic activity occurred in November 2001 -- but the NBER didn't make that determination until July 2003. By that time, the economy had been improving for over a year and a half!
Wait, stocks can go up in a recession?
Since 1945, there have been 11 recessions lasting an average of 10 months each. But according to a recent article from Hulbert, during these recessions, the stock market actually rose seven times -- and the average market return during all 11 recessions was 3%!
Those who ignore the past ...
During the 2001 recession, the S&P 500 fell about 12%. However, this was largely due to the abysmal performance of a few technology companies:
Meanwhile, quality companies with strong balance sheets, solid free cash flow, and shareholder-friendly management actually prospered during this period:
Heads you win, tails you still win
Here's how to silence the noise: Concentrate on finding the types of stocks that will perform well in any economic environment. I advise investors not to try to time the market or forecast the next recession. Rather, I advise that you only invest in quality companies with strong balance sheets, solid free cash flow, and shareholder-friendly management.
And fortunately, thanks to fears of an impending economic slowdown, many quality companies are available on the cheap.
Consider this as an example.
FedEx (NYSE: FDX), currently trading at the lowest price-to-earnings multiple the company has seen in a decade. FedEx has an extensive ground and air transportation network, strong balance sheet, great brand, and significant international presence. And as global commerce grows and the middle class expands, demand for FedEx's express transportation services will only increase.
A temporary slowdown in the U.S. economy would likely affect FedEx's earnings to some degree, but this is a company that generated $9 billion in international sales last year. If the U.S. economy does enter a recession, chances are pretty good that FedEx will survive. However, thanks to the market's irrational fear, today you can scoop up shares of this quality company at a discount to intrinsic value.
The above applies to even Indian companies and with BSE Sensex at 19000 now, many are available at reasonable valuations.
Monday, January 14, 2008
Insurance & Investment
On the last day of 2007, SEBI brought in new regulations that forbade mutual fund companies from charging load from investors in cases where investments were made directly to the fund company. And on the first day of 2008, another financial services regulator, the Insurance Regulatory and Development Authority (IRDA), also brought in a new regulation that has the potential to bring benefit to the public. However, the IRDA's action has brought almost no media attention, perhaps because its positive effects will be indirect and are thus not clearly understood. The change is very simple. From February 1, insurance companies will have to inform policyholders buying Unit Linked Insurance Plans (ULIPs) exactly how much of their money is being invested and how much is being consumed by other charges that the insurance company is deducting. The IRDA's circular specifies the exact format in which these charges will be documented, and this document, which will be signed by the ULIP buyer and the insurance seller will become part of the policy document.
Why is this important and why does it potentially have the power to change the way ULIPs are bought? Simply because ULIPs are being mis-sold (mis-sold being a polite way of saying con job) like no financial product has ever been mis-sold in this country. In India, ULIPs are a product which have been cynically designed to maximise profits to insurance agents (or 'advisors' as they are supposed to be called now) and insurance companies while hiding the true numbers from investors. Nominally, a ULIP is a product that combines insurance and investment characteristics. In reality, they combine an extraordinarily high cost structure (meant primarily to feed agent commissions) with a non-standardised revelation of expense so that any meaningful comparison of investment performance between different ULIPs or between ULIPs and mutual funds is impossible. In other investment products, either there are no agent commissions (as in bank FDs) or agent commissions range from 0.25 per cent to 2 or 3 per cent. In ULIPs however, commissions range from 15 per cent to (hold your breath) around 70 per cent and are typically 25 per cent. And for some bizarre reason, this is considered acceptable by everyone concerned. On 31st December, one financial regulator (SEBI) moved to push commissions down from 2.25 per cent to zero while another (IRDA) is OK with 25 per cent for what is essentially a competing product!
Basically, ULIPs are expensive and opaque mutual funds disguised as insurance. This permits the so-called insurance companies to circumvent the strict transparency, expense, and commission-related laws that govern mutual funds. It also enables them to escape the scrutiny of SEBI, which has historically been a tougher regulator than IRDA. Will the new regulations stop these abuses? No way. All I'm hopeful of is that a handful of alert and aware investors will read this new document and ask some tough questions. Anyhow, the realistic situation is that there's almost no chance that anyone will step forward and fix things. As someone responsible for your money, you need to be sensible yourself. Insurance is a great idea and most of us need it. But we need real insurance, which is to say term insurance. Here's what you should do. Make a liberal estimate of how much money your family will need if you die suddenly. Shop around and buy the cheapest term insurance you can find. You'll be stunned at how cheap term insurance is and also at how difficult it is to buy (The quickest way to get rid of an insurance agent is to say that you're interested only in term insurance). You probably won't be able to think logically about insurance as long as you don't realise that it's an expense. It's a necessary expense, like buying a helmet or going to a doctor, but it's not an investment. You need both insurance and investment. To get the best deal in both, don't mix them up.
Why is this important and why does it potentially have the power to change the way ULIPs are bought? Simply because ULIPs are being mis-sold (mis-sold being a polite way of saying con job) like no financial product has ever been mis-sold in this country. In India, ULIPs are a product which have been cynically designed to maximise profits to insurance agents (or 'advisors' as they are supposed to be called now) and insurance companies while hiding the true numbers from investors. Nominally, a ULIP is a product that combines insurance and investment characteristics. In reality, they combine an extraordinarily high cost structure (meant primarily to feed agent commissions) with a non-standardised revelation of expense so that any meaningful comparison of investment performance between different ULIPs or between ULIPs and mutual funds is impossible. In other investment products, either there are no agent commissions (as in bank FDs) or agent commissions range from 0.25 per cent to 2 or 3 per cent. In ULIPs however, commissions range from 15 per cent to (hold your breath) around 70 per cent and are typically 25 per cent. And for some bizarre reason, this is considered acceptable by everyone concerned. On 31st December, one financial regulator (SEBI) moved to push commissions down from 2.25 per cent to zero while another (IRDA) is OK with 25 per cent for what is essentially a competing product!
Basically, ULIPs are expensive and opaque mutual funds disguised as insurance. This permits the so-called insurance companies to circumvent the strict transparency, expense, and commission-related laws that govern mutual funds. It also enables them to escape the scrutiny of SEBI, which has historically been a tougher regulator than IRDA. Will the new regulations stop these abuses? No way. All I'm hopeful of is that a handful of alert and aware investors will read this new document and ask some tough questions. Anyhow, the realistic situation is that there's almost no chance that anyone will step forward and fix things. As someone responsible for your money, you need to be sensible yourself. Insurance is a great idea and most of us need it. But we need real insurance, which is to say term insurance. Here's what you should do. Make a liberal estimate of how much money your family will need if you die suddenly. Shop around and buy the cheapest term insurance you can find. You'll be stunned at how cheap term insurance is and also at how difficult it is to buy (The quickest way to get rid of an insurance agent is to say that you're interested only in term insurance). You probably won't be able to think logically about insurance as long as you don't realise that it's an expense. It's a necessary expense, like buying a helmet or going to a doctor, but it's not an investment. You need both insurance and investment. To get the best deal in both, don't mix them up.
Monday, January 7, 2008
What the charts foretell
What do technical analysts feel about the market in 2008? Renowned chartist Milind Karandikar shares his views.
Year 2007 really turned out to be “The Year of the Bull” as I had mentioned in my last article on January 8, 2007 in The Smart Investor. I received numerous mails following the article stating that I am trying to fool investors by giving some unrealistic projections of the BSE Sensex (20,000 by December 2007).
But, the Sensex did hit the target and fooled all those who did not trust my Neowave analysis. The stock markets would go where they would like to irrespective of what you and me wish. I am just an interpreter of the patterns they form.
No doubt that my analysis goes wrong on a number of occasions, especially in the short term, but on the longer term charts, the patterns look less confusing and future projections become more reliable.
Right now, the pattern formed is suggesting that another huge bull run is impending. The technical analysis of this pattern has been discussed in the Technical outlook paragraph.
Even though year 2007 closed with a bang with the Sensex closing above the 20,000 mark, it was a rollercoaster ride for the indices over the year. The Sensex survived two major falls of over 2,000 points in February and July 2007 and managed to close near the all-time high.
Fundamental issues like crude oil prices, US sub-prime crisis, kept on producing ripples in global markets. Many analysts were worried about overstretched valuations at 14,000 level of the Sensex and continue to be worried at 20,000 level. Some are afraid of a bubble forming but, the markets are not ready to listen. If a bubble is going to form, you and me cannot stop it.
On the contrary, majority would not agree to the existence of such a bubble. The reason being a bubble is called a bubble only after it bursts. Everyone wants the bull markets to prevail for ever. But, since every bull phase is succeeded by a bear phase, one has to be very alert about exiting the market.
Technical outlook
The weekly chart of the Sensex shows that after a huge consolidation period (1992-2003) we are in a big bull run for almost last five years now. This rally is a large X-wave, which I had mentioned in my earlier articles also. A zigzag (A) – (B) – (C) pattern is the first part of this up move followed by a connecting pattern (X-wave).
This connecting wave is in the form of a running triangle that began in May 2006 and ended in August 2007. The presence of such a running triangle indicates tremendous upside potential for the Sensex. The calculations based on Neowave theory (By Glenn Neely) suggest that the breakout from such a triangle should be at least 1.618 times the largest leg of the triangle.
This puts the Sensex target at around 27,000 mark. The breakout could be as big as 2.618 times the largest leg, leading to a mind boggling figure of 39,000. Even if we keep aside this over-optimistic view, the target of 27,000 could be achieved and that too most probably in the first half of 2008.
The daily chart shows one directional wave (A) followed by wave (B), which seems to be a diametric pattern. This pattern has seven legs and has a bow-tie shape.
This pattern seems to be almost over and the next wave (C) has began. I expect this wave to be again a directional move. Right now one cannot predict which pattern will finally evolve in the entire rally from the bottom of August 2007.
Investment perspective
The diametric formation mentioned in the last paragraph has appeared on most of the indices viz. Sensex, Nifty, BSE-500, S&P CNX 500, etc. Structurally, the patterns in broader market indices like BSE-500 suggest much stronger up move. It means that the chances are high for mid caps and small caps to outperform large caps in this rally.
But, one should choose fundamentally sound stocks from these sectors that have not somehow participated in the earlier rallies of the Sensex. There are always a lot of manipulated stocks from these sectors, which attract public attention and become good traps to lose money.
The sectors that are looking good right now are banking, steel and power generation. But, I personally feel that finally it would turn out to be a broad based rally in which most of the sectors would participate.
Finally, those who are investing fresh money have to be very cautious in selecting the stocks. And for those who are already holding good stocks for long time, my advice is Lage Raho Munnabhai!
Year 2007 really turned out to be “The Year of the Bull” as I had mentioned in my last article on January 8, 2007 in The Smart Investor. I received numerous mails following the article stating that I am trying to fool investors by giving some unrealistic projections of the BSE Sensex (20,000 by December 2007).
But, the Sensex did hit the target and fooled all those who did not trust my Neowave analysis. The stock markets would go where they would like to irrespective of what you and me wish. I am just an interpreter of the patterns they form.
No doubt that my analysis goes wrong on a number of occasions, especially in the short term, but on the longer term charts, the patterns look less confusing and future projections become more reliable.
Right now, the pattern formed is suggesting that another huge bull run is impending. The technical analysis of this pattern has been discussed in the Technical outlook paragraph.
Even though year 2007 closed with a bang with the Sensex closing above the 20,000 mark, it was a rollercoaster ride for the indices over the year. The Sensex survived two major falls of over 2,000 points in February and July 2007 and managed to close near the all-time high.
Fundamental issues like crude oil prices, US sub-prime crisis, kept on producing ripples in global markets. Many analysts were worried about overstretched valuations at 14,000 level of the Sensex and continue to be worried at 20,000 level. Some are afraid of a bubble forming but, the markets are not ready to listen. If a bubble is going to form, you and me cannot stop it.
On the contrary, majority would not agree to the existence of such a bubble. The reason being a bubble is called a bubble only after it bursts. Everyone wants the bull markets to prevail for ever. But, since every bull phase is succeeded by a bear phase, one has to be very alert about exiting the market.
Technical outlook
The weekly chart of the Sensex shows that after a huge consolidation period (1992-2003) we are in a big bull run for almost last five years now. This rally is a large X-wave, which I had mentioned in my earlier articles also. A zigzag (A) – (B) – (C) pattern is the first part of this up move followed by a connecting pattern (X-wave).
This connecting wave is in the form of a running triangle that began in May 2006 and ended in August 2007. The presence of such a running triangle indicates tremendous upside potential for the Sensex. The calculations based on Neowave theory (By Glenn Neely) suggest that the breakout from such a triangle should be at least 1.618 times the largest leg of the triangle.
This puts the Sensex target at around 27,000 mark. The breakout could be as big as 2.618 times the largest leg, leading to a mind boggling figure of 39,000. Even if we keep aside this over-optimistic view, the target of 27,000 could be achieved and that too most probably in the first half of 2008.
The daily chart shows one directional wave (A) followed by wave (B), which seems to be a diametric pattern. This pattern has seven legs and has a bow-tie shape.
This pattern seems to be almost over and the next wave (C) has began. I expect this wave to be again a directional move. Right now one cannot predict which pattern will finally evolve in the entire rally from the bottom of August 2007.
Investment perspective
The diametric formation mentioned in the last paragraph has appeared on most of the indices viz. Sensex, Nifty, BSE-500, S&P CNX 500, etc. Structurally, the patterns in broader market indices like BSE-500 suggest much stronger up move. It means that the chances are high for mid caps and small caps to outperform large caps in this rally.
But, one should choose fundamentally sound stocks from these sectors that have not somehow participated in the earlier rallies of the Sensex. There are always a lot of manipulated stocks from these sectors, which attract public attention and become good traps to lose money.
The sectors that are looking good right now are banking, steel and power generation. But, I personally feel that finally it would turn out to be a broad based rally in which most of the sectors would participate.
Finally, those who are investing fresh money have to be very cautious in selecting the stocks. And for those who are already holding good stocks for long time, my advice is Lage Raho Munnabhai!
Thursday, January 3, 2008
Will mid-cap funds be the flavour of 2008?
With each passing year, it is increasingly difficult to pin-point an asset class that will outperform. A common investor runs into a complex set of variables that need to be factored in while making an informed investment decision.
However, let us restrict ourselves to a relatively less complex opportunity of investing in domestic mutual funds schemes that could be the best option available which could out perform(of course equity based) in the year 2008.
The consensus of majority of analyst is that the domestic infrastructure spending would continue through 2008 and beyond.
The huge gap between what India needs and the existing infrastructure is enough to put conviction behind the theory that power, ports, roads, airports and along with these the equipment manufacturing companies would be clear beneficiaries.
Exchange rate sensitive sectors like IT and Textiles would continue to suffer.
Interest rate sensitive sectors like banking and real estate sectors are likely to out perform as interest rates have picked and are likely to come down from here.
Keeping in mind the above reasoning the mutual fund schemes one would expect to do reasonably well during 2008 include:
1. ICICI Prudential Infrastructure Fund, a thematic fund that benefit out of infrastructure themes, where five top sectors are oil and gas, power & transmission, steel, securities and banks.
2. Reliance Diversified Power Fund, a sector fund investing only in power and energy related companies.
3. Sundaram BNP Paribas Capex Opportunity Fund, which has a significant exposure to mid-cap plays and would benefit from capex spending.
4. Sundaram BNP Paribas select focus, a large cap play with focused approach to few selected companies.
5. SBI magnum Global fund, a mid-cap fund with higher exposure to housing and construction, metals, engineering, electrical equipment and software.
It must be noted that some of these schemes can be highly volatile due to their inherent portfolios.
Considering the valuations of some of the large caps and to sustain the pace of growth, I believe, make 2008 the year of mid-caps.
Don’t miss out on them
Happy mid-cap investing in 2008
However, let us restrict ourselves to a relatively less complex opportunity of investing in domestic mutual funds schemes that could be the best option available which could out perform(of course equity based) in the year 2008.
The consensus of majority of analyst is that the domestic infrastructure spending would continue through 2008 and beyond.
The huge gap between what India needs and the existing infrastructure is enough to put conviction behind the theory that power, ports, roads, airports and along with these the equipment manufacturing companies would be clear beneficiaries.
Exchange rate sensitive sectors like IT and Textiles would continue to suffer.
Interest rate sensitive sectors like banking and real estate sectors are likely to out perform as interest rates have picked and are likely to come down from here.
Keeping in mind the above reasoning the mutual fund schemes one would expect to do reasonably well during 2008 include:
1. ICICI Prudential Infrastructure Fund, a thematic fund that benefit out of infrastructure themes, where five top sectors are oil and gas, power & transmission, steel, securities and banks.
2. Reliance Diversified Power Fund, a sector fund investing only in power and energy related companies.
3. Sundaram BNP Paribas Capex Opportunity Fund, which has a significant exposure to mid-cap plays and would benefit from capex spending.
4. Sundaram BNP Paribas select focus, a large cap play with focused approach to few selected companies.
5. SBI magnum Global fund, a mid-cap fund with higher exposure to housing and construction, metals, engineering, electrical equipment and software.
It must be noted that some of these schemes can be highly volatile due to their inherent portfolios.
Considering the valuations of some of the large caps and to sustain the pace of growth, I believe, make 2008 the year of mid-caps.
Don’t miss out on them
Happy mid-cap investing in 2008
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