“Mother of all bull run is yet to come for Indian Stock Markets.” Rakesh Jhunjhunwala, India’s Warren Buffet

“Equities as an asset class which tend to move upwards” Shankar Sharma

In the current market situations the argument would seem to be risky and uncertain, but great potential too.

Macro Economic Factors that led to the fall of Stock Markets in India and world over:

1. Banks and NBFCs with help of Financial Engineering tools structured loans and mortgages and enabled credit to individuals with poor repayment capabilities. Post Dot com bubble low interest rate was one of the reasons that fuelled the flow of cheap credit. This cheap credit fuelled housing market in US and boosted consumption in US. When unwinding took place the whole thing collapsed. As companies were leveraging the leveraged, when unwinding took place there was no fresh source of funds (LIQUIDITY dried up) due to lack of confidence. This led to the fall of decade old institutions.

Governments around the world gave out more than a of Trillion dollars to save their Banking and Financial institutions. Fitch in 2007 rated Bear Stearns stable and a company corporate governance higher than Infosys.

1. Due to the collapse of these institutions, their subsidiaries started pulling out, booking profits in emerging markets. International investors sold a record $13.5 billion in Indian equities this year as of start of Dec 08, according to data from the Securities and Exchange Board of India, as global credit losses and writedowns approached $1 trillion.

This led developing-nation index down 55 percent this year.

1. The collapse of such behemoth corporate giants, jobs loss there is slowdown in consumption. US, Japan, UK and other major European economies are in recession or growth has slowed down. India’s has also been impacted by this financial turmoil. But I would like to say that in India growth has been impacted and it has slowed down and not recession.

Earnings forecast have been revised on the downward and these have been factored in their stock price. Companies have put on hold their green field and inorganic (M&A) plans due to the gloomy outlook and lack of availability of funds.

The reason behind the fall of these institutions and how to avoid the state in which economies world over are right now will be a subject of research for many and would definitely yield a few Nobel prizes also.

“The Dow was 1000 in 1965, it was2000 in 1989. It doesn’t mean that if America has trouble, India is not going to prosper, to grow.”Rakesh Jhunjhunwala

Fundamentals for Indian Equities and Indian Economy:

1. Consumption: Indian Economy is based on the local consumption. This domestic consumption has slowed down and people have started holding back their purchases. But this domestic consumption it is not fuelled by cheap credit as in US. The fear of defaults on home loans, card loans is not there as it is in US.This consumption is mainly led by Indian Middle class, which is higher than those in Europe
2. Investments: When the confidence returns and investments start it will lead to growth also process of investments itself is a provider to growth.
3. Exports: With softening in commodity prices and rupee at current levels and expected to be in the range of 44~45 it will be a strong booster to exports. Also outsourcing pie would help further.

India’s economy grew at a faster-than-forecast 7.6 percent pace in the second quarter from a year earlier. The rate is the fastest for a major economy after China’s 9 percent and compares with 6.8 percent in Brazil and 6.2 percent in Russia.

Source : IBEF

4. Interest Rates: “Lower interest rates have an anti-gravity (growth) effect” Warren Buffet

a. Prepones consumer spending by greater availability and lower cost of credit

b. Encourages capital spending

c. Enhances corporate profitability

d. Boosts value of Capital Assets

e. Increases viability of infrastructure projects, enabling debt funding of infrastructure

f. Improves Government finances by lowering the deficits and increasing maturities

With Mr. Kamath, Chairman ICICI Bank expecting inflation at sub 4% levels deposit rates at 6% and lending rates at 8~9% would provide impetus.

5. Inflation: Inflation in India was a commodity led inflation and with the fall in commodity prices, inflation has dropped with last week figure at 6.61% with a peak of 13 % in June 08. Also Central Government of India other countries are more worried about growth rather than inflation.

Source: RBI

The above mentioned parameters are the ones which have been affected due to the global scenario.

But the inherent strength of the Indian Economy is due to some of the following mentioned parameters which still remains.

· Human Work Force: Skilled People, savings oriented

· Demographics: Young working population with 54% less than 25 years of age. One of Youngest countries in the world.

· Political : A stable democratic country. With elections in near future any Government led by BJP or Congress without Left supported would be positive.

The growth in each industry segments is leading to overall robust performance of Indian Economy.

Source: IBEF

Above, India’s GDP Composition is akin to that of developed countries with more than 50% of it coming from services sector.

With improved performance in Price to Earnings(P E) Ratio and Return on Equity(RoE) has attracted strong FDI and FII flows in India

Source : IBEF

Return on Equity

Source: Morgan Stanley

Since last few months people are in cash and/or invested in FD. PSU banks have been able to raise deposits at lower cost and they inturn are parking these money into G-Securities. At some point of time banks will start lending and people will look at other asset classes to invest with lowering interest rates yields. Banks in November 2008 parked 95000 Crores in Bonds as compared to 7000 Crores in October 2008.

India’s domestic savings is about 30% of its GDP. Every if incremental 2% of starts coming into stock markets, with same growth rate in GDP we would be having around 35 USD coming into markets by 2010 of domestic money. Also if government allows pension funds and provident funds to invest say 5 % more in market than that could bring and additional 15 USD more in the market. Also Indian Economy in the next 2-3 years will not be able to handle more than 30 USD a year. We had seen last year when FII were in a buying spree last September to December 2007, SEBI and RBI had to intervene to check the inflows.

With such huge domestic money and capital available domestically we need not worry about FII inflows. Also the Returns that sensex has generated positive returns over past years.

And finally investing in Equities is a Tax Paradise:

1. Short term Capital Gains Tax of 10% if sold within one year of purchase .

2. Long term Capital Gains Tax for equities sold after one year of purchase is “Zero”.

Disclaimer:

My optimism at times would seem to be influenced by Ace Indian Investor, Trader and Venture Capitalist, Rakesh Jhunjhunwala, from whom I have learnt and benefitted a lot.