Market tips for financially sound '09

The year 2008 has been quite turbulent for investors. From an all-time peak of 21,206 in January, the BSE Sensex plummeted by more than 50% to 9000 levels in December.

Networth of equity investors has halved. The global slowdown has also had its impact on the job sector, which has added to investors’ woes. Let’s take the example of a cloth merchant.

He bought a stock when it was just priced at Rs 3. Subsequently, the scrip rose to Rs 120 when his financial advisor asked him to sell the stock as it had no intrinsic value.

The artificial rise in the price, however, made him stick to the stock. Now, it’s trading at Rs 12. The biggest lesson the businessman learnt was every asset has a real value.
Kartik Jhaveri, a certified financial planner, says, “Whether it is real estate or stocks, there is a fair value. Some exuberance would have propped up the value of a stock worth Rs 100 to Rs 400 but that doesn’t mean the stock will touch Rs 800 for you to book profits in the future. Similarly, real estate prices move in line with inflation. If you have booked a flat worth Rs 10 lakh, you can expect an appreciation of 8% in a year. Anything in excess would be artificial, which would eventually crash.”

The year also taught you that things that look rosy can actually turn ugly in a short span.

“If you have a steady income, ensure you at least save 30% at all times. If the times are good, you can easily save up to 50% of your disposable income, which can be of help during a contingency,” Mr Jhaveri adds.

Another lesson learnt is to avoid over leveraging. This simply means if you can afford only a 2 BHK, stick to it. Till 2004-05, some banks were willing to finance 90% of the property value.
Now, it’s the borrowers’ headache to foot that expensive EMI at such turbulent times when their investments are underperforming.

At any point in time, a borrower should not borrow in excess of 70% of the house value. If you are planning to buy a house now, the loan-to-value ratio should be still lower at 60:40. That will give you additional flexibility to deal with your finances.

Also, it’s a bad idea to borrow for investing in stocks.

“Restrict your stock exposure to the personal funds you can use as no asset class can appreciate forever. Investors particularly borrowed to invest in IPOs. But investing in IPOs turned out to be the biggest joke in 2008,” says Amar Pandit, a certified financial planner.

Finally, remember what suits your best pal isn’t exactly what you need. If he entered the market around 10,000 and exited near the 15,000 mark after booking profits, you don’t have to adopt the same strategy.

You can build up your reserves now and capitalise on many more bull runs to come. However, the underlying assumption here is that you should stay invested up to at least 5 years to withstand the highs and lows.

Moreover, at such times, you should lock your money in instruments that have the least exit penalty. This flexibility is essential to encash for upcoming lucrative opportunities.

Indian investors braced for sharply lower earnings

Indian shares will face strong headwinds this week as investors brace for sharply lower quarterly earnings, which will start flowing in January and an uncertain global environment for capital flows.

The outlook for corporate earnings took a knock on Friday when the government said advance tax collections from companies for the December quarter fell 22 per cent from the same period last year. It was the latest in a series of data that pointed towards a deepening economic gloom.

"This should redouble efforts to tackle the problem more vigorously, but the government's responses have been painstakingly slow and too little," said equity analyst Mehul Patel.

"Neither are companies willing to go the extra mile to lure buyers back."

For more than two weeks it has become evident the government would have to further slash interest rates, cut taxes and increase spending to halt a rapidly slowing economy and revive growth.

The central bank has lowered its main short-term lending rate by 250 basis points since mid-October to 6.5 per cent, but this is still relatively high compared to US rates at 0-0.25 per cent, or Japanese at 0.1 per cent.

"An aggressive monetary policy may be necessary if the global economic dep-ression continues to adversely affect manufacturing," the finance ministry said in a mid-year review report released last week.

"Having run a tight monetary policy during first half 2008-09, there is considerable scope for monetary policy easing over the next six to 12 months to offset the global increase in demand for money that is being transmitted to India," it said.

Foolhardy

The report intensified expectations the central bank would reduce rates by at least 100 basis points, but the Reserve Bank of India (RBI) has given no hint when it would do it.

The RBI is scheduled to review policy only on January 27, but it can intervene early.

"It is desirable to cut the repo and the reverse repo rate, I think, by 100 basis points in my judgement," said Suresh Tendulkar, chairman of the prime minister's Economic Advisory Council.

Patel said falling inflation should give the RBI more reason to cut rates.

Annual inflation dropped to a nine-month low of 6.61 per cent in mid-December, well off a high of 12.9 per cent in early August and analysts are forecasting it will decline to less than three per cent by March.

The top-30 Sensex fell 7.6 per cent last week, its biggest weekly drop in two months, to 9,328.92 as foreign funds turned net sellers of more than $150 million (Dh550.98 million) after buying $365 million earlier in the month.

The fall picked up steam after the government said advance corporate taxes for the December quarter fell to Rs426 billion (Dh32.30 billion) from Rs549 billion in the same period last year.

The Sensex is on course to post a fall of more than 50 per cent in 2008, largely on foreign portfolio outflows of $13.3 billion. In comparison, the index had gained 47 per cent on the back of record foreign investment of $17.4 billion.

Patel said the outlook for 2009 was dismal. "There will be more pain for company earnings," he said.

Part of the problem was because companies such as developers were reluctant to cut prices.

"It's foolhardy to expect falling borrowing costs alone to bring buyers back," Patel said. "Apartment prices had more than quadrupled during the boom over the past three to four years; they will have to come down."

The finance ministry said GDP growth in 2008-09 would slow to about seven per cent from nine per cent in 2007-08, and its adviser Arvind Virmani said the RBI should put more emphasis on growth.

The expectation matches private forecasts but many economists believe expansion will fall to about six per cent in 2009 to 10. The government has announced plans for extra spending of $9 billion to prevent a sharper slowdown, but it knows this will not suffice to undo the damage and another economic stimulus package is needed.

However, Tendulkar said the government needed to see the impact of its first stimulus package announced early in December, before it could consider more.

"We are seeing some teething problems in the implementation of the first package," he said. "The second stimulus package will depend on the response to the first one."

Securities firm Macquarie said in a report last month that unlike China, India had little scope for significantly boosting fiscal spending and so policy reliance would be on aggressive monetary easing.

"India's investment spending will be a serious casualty of the current global crisis, despite the economy's relatively low export-to-GDP ratio."