Investor’s Delight

Are you worried as a investor? Most probably the answer is yes. If we rewind last five years, it’s been a roller coaster ride for most of the investors. The average return for Sensex in last five years have been close to 0%. The classic comparison is between fixed deposit and Sensex. In last five years fixed deposit have given on an average 8.5% PA, While sensex has give 3% return. In hindsight if we compare, it was much better to own fixed deposit than sensex.

When I read my newspaper today, I can easily feel bearish and feel like selling whatever I have. But to give myself confidence I have analyzed some data which I would like to share with you all. Following are sensex return for last 32 calendar year.

Year	Return	Year	Return
1980	28.86%	1996	4.24%
1981	49.56%	1997	13.31%
1982	3.56%	1998	-17.17%
1983	7.20%	1999	63.57%
1984	8.15%	2000	-20.99%
1985	100.95%	2001	-17.92%
1986	-1.34%	2002	4.44%
1987	-18.43%	2003	74.49%
1988	49.06%	2004	11.62%
1989	18.85%	2005	42.33%
1990	27.56%	2006	48.35%
1991	95.88%	2007	45.61%
1992	33.62%	2008	-51.22%
1993	27.94%	2009	76.35%
1994	17.51%	2010	17.43%
1995	-20.45%	2011 till 7th Dec	-17.71%

Some observations are.

1. Sensex has been negative for 8 years out of last 32 years i.e. 25% of time.

2. It’s been only two times that sensex has given negative return for 2 consecutive years.

3. After 2 years of consecutive negative return in year 1986-1987 sensex gave absolute return of 789% in next 7 years.

4. After 2 years of consecutive negative return in year 2000-2001 sensex gave absolute return of 525% in next 6 years.

5. In absolute terms value has gone up 140 times i.e. 10 Lac investment has become 14 crores in last 32 years (CAGR 16.80%)

6. Fixed deposit in same 32 years would have multiplied to 2.1 crores.

Action Plan

1. Do not panic.

2. Do not sell equity at any cost.

3. Start looking equity more constructively and load in every fall.

4. If market start going up at some point of time, do not sell if you start recovering your losses. Foreign investors wants you to sell at those points.

5. Always remember foreigners wants you to buy high and sell low.

6. This is a golden chance to reverse the trade for us.

Yield Curve has FLATTENED OUT

Yield curve can be prepared by plotting interest rates for various maturities on a graph paper. These maturities ranges from 3 months to 30 years. Logically Interest rate for 3 months will be lowest & for 30 years will be highest. Yield in layman terms means interest rates. Also yield curve can be termed as interest rate curve. Slope of yield curve says a lot about state of the economy and future of economic activity.

At various point of time we can see different slopes for yield curve.

1.  Normal Yield Curve – When the yield is increasing incrementally for higher tenure. This will denote normal expansion in economic activity.

2.  Steep Yield Curve – This can be seen when there is highest difference between 3 months interest rate and 30 year interest rate. Normally in excess of 3%. This denotes that the economic expansion will be fastest in times to comes. Also this signifies that demand for long term money is highest which goes towards creating capacities, which is long term in nature.

3.  Inverted yield curve – This is typically when interest rates are high and economic activities are slowing down. Demand for long term money is lower since people fear slowdown. Short term rates goes up due to increase in inventories and working capital. Also smart investor try to lock their money at higher interest rate before fall in economic activity.

4.  Flat Yield Curve – This is where the rate across maturities is flat. Yield curve can move in any direction – towards normal yield curve or inverted yield curve. This is where one has to be cautious. This is early signs of slowdown in economic activities. Nine out of ten times it will lead to inverted yield curve.

Today as we speak we have pretty flat curve where 3 months and 30 years money is available at same interest rate. Today market is advising short term funds where they are expecting yield curve to become normal by reduction in short term rates and increase in long term rates. We at JAIN INVESTMENT believes that economic activities will slow down and long term rates may remain same or go down and short term rates may move up making yield curve inverted. We are advising our client to be either in liquid or at longer maturities (If you are investing for long term).

Caution – Last time yield curve became inverted was October – 2008. I hope you remember what followed. 

Time to look at Gilt Fund

Gilt fund are fund which invest in Government of India Securities. These are safest instruments in India with sovereign rating. There is no default risk in Gilt.

Risk profile – Moderate Risk

These instrument are subject to interest rate risk. They work inversely to movement in interest rate. If we buy 10 year GSEC paper @ 8.82% today and interest rate moves up Gilt prices will come down and vice versa. As government finances are in bad shape due to rise in fuel subsidy they will have to aggressively borrow in next six month. Market is factoring in aggressive borrowing and hence yield has gone up from 8.30% to 8.82%. This may further go up to 9.0%.

If we buy @9.0% 10 year Gsec paper and if interest rate come down by 1.0% in next 1 year we will have paper which is earning 1% more for next 9 years, which will be converted into premium for these paper by 6% to adjust to fall in interest rate. So return will be carry of 9.0% and capital gain of 6% which makes it 15%. In case of interest rate going up by 1% we will have 9%-6% = 3%.

In our opinion we are nearing the peak and any further rate hike will be detrimental to growth. Also there are imminent signs of slowdown. We would advise you to enter these funds in systematic manner.

Our advice is to look at combination of liquid plus / short term / Gsec funds in these high interest rate environment.

After peaking out of rates there are two possibilities.

1.       Fall in interest rate like 2008 where commodity prices come off sharply and interest rate come off sharply. In this period Gilt fund delivered 28-40% return in one year. This is less likely scenario.

2.       Fall in interest rate over next 2-3 years where interest rate cam off slowly and return in gilt fund was in excess of 15% for next three years.

This is time to avoid Fixed deposits as banks will go ahead and invest these money in such instrument to make capital gain.

Blood on the Street

When there is blood on the street my mind start searching for positives within negatives. In last 10 days of vicious fall India has shown relative strength compared to other market. Which gives me lot more comfort that people are not willing to leave India. Obviously there is a coupling and we are witnessing similar fall. But degree of fall is muted. Which is clearly dictating that we will do relatively better compared to other markets in fall as well as rise.

Will US downgrade and European crisis bring world to standstill. My mind clearly says no. We all are part of capitalist world economy. If capitalism comes to an end we will have ruins and nothing will work not yours bank deposits also. Most of the time investors are rewarded for lending capital in the toughest of times. These are trying times.

Let’s not forget the Big picture.

1. China & India with other economies will grow at faster rate than western world.

2. There is rise in per capita income and education system in these economies which will improve productivity and standard of living.

3. Capital will flow from western world to emerging market in search of return.

4. INDIA & CHINA will emerge as two largest economies of the world.

One should always invest when there is BLOOD ON THE STREET. Even if it is your own BLOOD.

When you will see yourself 10 years ahead. You will sit back and repent why I missed that opportunity.

And remember don’t expect short term returns by investing in these times.