Investment strategies for 2010

Moneycontrol.com - Investment strategies for 2010: "Investment strategies for 2010
Published on Tue, Dec 29, 2009 at 13:24 | Updated at Tue, Dec 29, 2009 at 14:37 | Source : Moneycontrol.com


2009 has been a rollercoaster ride for major asset classes such as equity, debt and real estate. The only exception was Gold which not only survived the wild swings on the way downward but made new highs with the spot price crossing the 18000 mark for the first time. Since the peak gold has corrected almost 6-7% and seems to be consolidating at the current levels. So what does 2010 hold in store for investors?

Let’s take a look at each asset class and explore the opportunities and threats.

Equity: 2009 has proven to be a golden year for the stock market with returns of around 64% till 21st December 2009. Markets have been range bound for a while now and Nifty was unable to break 5200 on the upside and it seems now that we are in a corrective phase since the last few days. There is a lot of noise of a further 20-30% correction. There is nothing impossible in the markets and there is no sane way of really figuring out whether a 20-30% correction would indeed happen. If a sharper correction does indeed happen, then it could be an exciting opportunity for people who have missed the bus. On the other hand what happens if the market corrects a little (10%) but then goes up sharply in the first couple of weeks of January or does not correct from the current levels and goes up.

There are many events such as the third quarter corporate earnings, budget, interest rate announcements by the RBI, global earnings data and so on that will have a major impact on the stock markets. The point I am making is that there is no way one can predict the course of the Sensex or Nifty over the next few days or months. Valuations might look a little stretched but again GDP and earnings growth are improving quickly. Typically when markets recover valuations do look stretched for a while because there is more money coming in as earnings start to catch up and before you realize markets can tread much higher levels. Advance tax numbers have been good and corporate earnings in the third quarter is likely to be strong. I will not be surprised to see markets inch upwards to very high levels by Diwali time (2010) or late next year. I believe that domestic liquidity primarily from life insurance companies will be extremely strong into 2010 and they will buy heavily the dips that markets would present from time to time.

Your strategy should be to invest regularly through SIPs or in a staggered manner and take advantage of the dips. This has been one of the best ways to make money in the Indian stock markets in the last 25 years and 2010 will be no different. At the same time if the market shoots up sharply we will rebalance your portfolio. In fact rebalancing the portfolio will be a very important theme in 2010."

Gold: Indians have always been big buyers of gold. However once the price crossed 15000 and scaled new highs, buying interest has gone down as many believe that gold prices are way too high. At the same time central banks around the world have been buying gold as if there is no tomorrow. One of the key reasons is that gold is an alternate currency that can come in extremely handy during tough times. I decided to check on the Gold Knowledge Quotient of several people with a very basic question and trust me the answers were uninspiring.

1. What percentage of gold is actually present in 22K gold jewellery?
2. If the gold price is 18000 in the spot market, will you get the same rate for your jewellery?

Gold is traditionally weighed in Troy Ounces (31.1035 grammes) which is 3.1 tolas. The proportion of gold in jewellery is measured on the carat (or karat) scale. The word carat comes from the carob seed, which was originally used to balance scales in Oriental bazaars. Pure gold is designated 24 carat, which compares with the "fineness" by which bar gold is defined.

Pure gold Gold alloys	Caratage	Fineness	% Gold
	24	1000	100
	22	916.7	91.67
	18	750	75
	14	583.3	58.3
	10	416.7	41.67
	9	375	37.5

As you can see from the above table, 22K gold has just 91.67% of gold.
Try selling jewellery anytime and the first thing that a jeweler will do after verifying the purity will be to multiply the spot gold rate by 91.67 %. Hence when you sell gold even though the price of gold might be 18000 you will get far less than 18000 (at least 9.1% less) . Hence when you buy gold you must make sure that you are charged in the same proportion.

Gold is a great buy at 12000 but many experts believe that we will never see those levels. In fact some even believe that we will never see 15000 levels in gold. However being an optimist, I like to believe that sooner than later we might get to see 15000 odd levels. The best strategy once again is to invest in a staggered manner on the downside.

Invest in gold every month and the best part is that you can even buy 1 gm every month through a Gold Exchange Traded Fund. There are several such as Benchmark, Kotak, Reliance, Quantum, UTI and SBIMF Gold Exchange Traded funds that you can buy. Gold has given excellent returns in the last 7 odd years and I like to believe 2010 will be no different if the price corrects from the current level of Rs. 17000 to slightly more meaningful levels.

Real Estate: After a correction of 20-30% or so between January and May 2009, prices have started to look up again. Builders have been able to raise funds easily after the election results in May 2009 as some FIIs were more than keen to take exposure to the real estate sector. However this is one asset class where you can see a huge bubble building up because the single factor – affordability, which determines the fate of the real estate market, has gone for a toss. No business can run on funding forever and a business must sell and generate free operating cash flows. A slowdown in home loan growth is clearly visible even at very low rates. One of the key things which a lot of builders are missing out is that people do not buy real estate markets because interest rates are low. They buy because prices are affordable and there is a clear need. Ask yourself “Would you buy something if interest rates are 0% but you are unable to afford it?” We all saw the effects of this miscalculated borrowing through the sub prime crisis. A sub prime might not happen here as a lot of real estate dealings are still in cash and also the fact that Indians have been prudent savers and buyers. However given the state of real estate prices which are artificially held up, prices must correct by 30-50% from the current levels for houses to be affordable. 2010 might not be that year as a lot of developers have paid off their debt for 2010 as well but the same cannot be said of 2011 and beyond if prices are not brought down meaningfully. Till then you will not miss much by not taking exposure in this space unless there is a mouth watering deal that comes around.

Debt: Rising inflation is a huge concern and it is quite likely that RBI will hike CRR (Cash Reserve Ratio). CRR is the percentage of amount banks must keep with RBI. The hike will help in sucking out excessive liquidity in the system. Bond Yields have already started hardening and one is already witnessing negative returns from gilt and long term income funds. The best options in the debt fund space here will be to look at Fixed Maturity Plans (FMPs), and Short Term Income Funds which can still generate around 7% post tax returns. In the highest tax brackets, the best avenue for short term money is liquid plus and floating rate funds. When it comes to fixed deposits, do not lock yourself in long term fixed rates as the rates could get better late next year. The key here is to look out for better post tax returns.

Like elsewhere in life, it really pays to keep things simple and this is what you need to precisely do in 2010.

Wish you and your family a Very Happy, Healthy & Prosperous 2010