It's been a bad year across asset classes, whether one bought into a commodity or a stock or the stock market.
It was one where the Sensex started off with the market close to 21,000 and before closing, crashed almost 50%. Global markets came off a whole lot as well — which can be a little comforting.
It also came off very sharply for the big stars of 2007. Real estate is one of the biggest losers this time around. Metals, infrastructure, everything that had the sheen of gold to it in 2007 has come off this time around, which is why we are doing it a bit differently towards the end of the year.
Here's a guide on what you should prepare yourself for in 2009, whatever be the space you want to look for. If you want to look at a mutual fund or you want to look at the equity market or with commodities or a call on home loans or any kind of loan next year, what should you expect from rates? CNBC-TV18’s Managing Editor Udayan Mukherjee answers.
Here is a verbatim transcript of Udayan Mukherjee's exclusive interview on CNBC-TV18's show Classroom. Also watch the accompanying video.Q: This has really been a full-blown bear market that many young people including myself have not seen in the past. The question is: what does one expect going into 2009?Mukherjee: It is a difficult question to answer because at the start of the year a lot of people put forward a lot of opinions. Twelve months is almost like an eternity in the kind of world that we live in. So, the one caveat before I answer that to the best of my ability is: you must at every point reassess the situation. So, whoever you follow in the market, you cannot get stuck to one piece of opinion, which was given on December 31 or thereabouts and say that was the call for the entire full year because the best of analysts will go wrong. There will be twists and turns along the way and the thing about equities is that people change their opinions as they should at every interval depending on how the world is evolving and so should you as an investor.
You cannot be stuck with a predisposition of being bullish or bearish that you took at the start of this year. Having said that, you've put 12 months of utter bearishness behind you in 2008. Therefore to go into 2009, you’ve got to keep the history in mind that. Yes, you may be in a bear market but you've already put behind 12 months of it into stock prices.
So, there could be wild fluctuations and the one thing that could actually play out at some point or starting some point in 2009 is the market gets into some kind of a trading range, which we haven’t seen in 2008. It has been one big drift down.
So, in 2009, if history is any indication you could start to get into some kind of a trading range. I have no idea, not the foggiest notion of what that trading range could be. It could be 7,000-12,000; it could be 10,000-15,000. So, there is no saying what that range will be. But as an investor, what pays if you look back into the couple of times I have seen these ranges play out is: you approach some kind of a trading attitude or disposition to the market, which is you don’t want to get wedded into stocks. You say every time there is panic and the market goes down to maybe those sub-10,000 levels then you buy and play for those rallies because at some point you get those bear market rallies maybe to 11,000-13,000. At that point you take your profits once again.
So, my approach in 2009 till the market tells you that it has begun trending once again, which it has not at the end of 2008, is to try and take away 15-20% whenever the market is giving you and then preserve your gunpowder for a better day.
Q: What about the less active investors? The problem with this year is not the fact that people who invested or got into the market this year were suffering. It is the people who have been holding for many years via mutual funds also came out with very deep cuts. What happens to those kinds of longer-term investors?Mukherjee: If you are a mutual fund investor and you have that predisposition that you would buy when the markets are down and you would hold for two-five years and make a lot of money. The prudent approach from an equity mutual fund investor's point of view, then, would be to buy at low levels for the market.
So, the one thing that you have to tell yourself is: you cannot time the market perfectly, but you know that the market in 2008 had gone and visited 7,500. So, you keep that as a ballpark figure saying those are the lows. I will buy close to the lows.
The risk for that kind of assessment is that the market runs away from you and does not get back to sub-10,000 levels. So, I may start at 9,000 and buy all the way till 7,000 or below wherever the market goes. But at least I have that cushion of safety at around those kinds of levels and I do not chase prices above 11,000-12,000 and then commit money. So, as a mutual fund investor — not a trader — buy low should be the mantra of 2009. Every three or six months you get those periodic dips and that is the time to deploy money and wait for a couple of years after that.
Q: One thing that worked for the better part of this year was playing it through the fixed income route. Because of what's been happening in the macro-environment though, is that a good plan for 2009?Mukherjee: The interesting thing is that people did well to hide in the fixed deposit or fixed income in 2008. 2009 will be not such an easy decision for two reasons. One is that fixed deposits will start getting you less and less. The tax rates will probably remain the same but those days of 10.5-11% fixed deposit are probably not going to exist in 2009. Now fixed deposit rates will keep coming down in 2009. My own assessment is that by the time we are done with the year, one is probably talking 8% FD or something like that. It could be 50-75 basis points here or there but if it is indeed 8% then you’re talking three percentage points lower on FD — 8% FD return meaning post tax one is talking closer to may be 5.5-6%. Now you are already at 6% virtually, how much lower will the benchmark yield go — 5-5%? But you will probably in the last bit of that government security rally with maybe not too much to go. The easy money has been made in that fall of the yield from 10% to 6%. So you would want to reassess how you’d want to structure yourself. You could still get reasonable returns from fixed income mutual funds but the party to a large extent has played itself out and may be the end of the party gong is about to go.
Here are expert opinions on 2009 and what you should be prepared for:Atul Suri, Trader: Identify a trend from a good 50-day moving average. Identify the weak sector, very often the most fancied sector becomes the weakest. We’ve seen it in the 2000 slump and we see it now. In that, look for those restless losses that are tending to fall or go down much before the market goes into things. That helps you to really identify stocks and that is really what you can go out and short.
Jyotivardhan Jaipuria, Head of Research, DSP Merrill Lynch: Ultimately what as an investor you are bothered about is the profit growth rather than the sales growth because you don’t want somebody to keep having huge sales growth, which is very unprofitable.
Dr. CK Narayan, ICICI Securities: This is more from a money management perspective; you can have any kind of stop. But then it should be meaningful to the amount of money that you have. There is no point in having a 5-15% stop because it will blow you out in three trades and all your money is gone. So, have it realistic aligned to the capital, make it 1-2% at the most, so that you will be alive to take more trades and hopefully make more profits.
Nilesh Shah, MD & CEO, Envision Capital: What we have seen over the last few weeks is that the commodity cycle seems to have got busted. Commodity prices across the board are virtually at a four- to six-year lows. I This really bodes well for India because India is a net consumer and a net importer of commodities. What this will do is it will reduce input costs for companies, it will therefore improve their profitability and inevitably lead to lower prices for the consumer, which in turn would lead to increased demand over a period of time. So, I think commodity prices have significant implications and the recent correction in commodity prices really augurs very well for an economy like India.
Here's is a CNBC-TV18's Anichya Shah on bear market lessons to be learned from 2008. And before.We have seen about 25 bear markets including this one since the 1870s. [US Federal Reserve Chairman] Ben Bernanke's predecessor Alan Greenspan has called this the worst financial crisis in the last 50 years. So what are the key takeaways from this entire global meltdown?
The biggest mistake investors made was saying that this time it is different. It usually never is. Remember Benjamin Graham once said that Wall Street is a place where people learn nothing and forget everything. Make sure that does not happen because the villains change but the outcome remains the same.
Leverage is okay but only to the amount and the extent that one can afford to lose completely because the risk reward ratio does act as a double-edged sword.
Avoid catching a falling knife. That was the biggest mistake a lot of investors made after the January sell-off. To quote trading great Jesse Livermore, he said: never add onto a losing bet.
Bear markets like bull markets are cyclical. They do take their time but patience is a virtue in such markets.
To quote Warren Buffet on the next one: look at market fluctuations as your friend rather than your enemy. Profit from the folly rather than participate in it.
Do not fear this 50% sell-off and look for opportunities. Having said that, traditional valuation tools like price-to-earnings, price/earnings-to-growth or PEG, EV/EBIDTA may not work effectively in a bear market when the earnings component is not known. Core balance sheet stripping is the only way to go.
New stars and sectors emerge from each bear market going into a new bull market. So don't fall in love with your old investment ideas. Remember to narrow your portfolio down to few core and key stocks because it is very difficult to track a very large falling portfolio.
Wall Street is always right and it usually always does lead to the Main Street. Lastly, use this time of the bear market to update your skills, go back to school, read a few books, do some bottom-up analysis so that you profit from the next bull market.
Here is an interview with CNBC-TV18’s Associate Editor - Financial Markets Latha Venkatesh on macro trends to watch out for in 2009.
Q: We saw this trend developing towards the end of the year. Can one expect significantly lower rates and also yields going into 2009? What is your sense?Latha: Inflation can dip fairly sharply. Remember in August 2008, inflation was as high as 12.6% largely because crude was at USD 147 per barrel. When you do year-on-year comparisons, chances are next year we will not only get down to 1% but perhaps even get a couple of negative numbers. That cannot be ruled out. So, inflation pushing down interest rates is always there.
The other factor will be risk aversion. One should see banks continuing to be a little wary of lending to corporates liberally because the downturn is still playing out. There are still people who are using capacity less than they did in the previous few months and that will not go away in a hurry. We will see that pain getting extended into the first quarter of 2009. So, when there is risk aversion, where will people put money? They will put their money into government bonds.
Also the government and the RBI will perhaps have to take a couple of more steps. They have the headroom in terms of inflation; they can take a couple of steps in terms of cutting down the reverse repo rates. The call is already getting louder. So, to expect the reverse repo to go to 4.5% in January and perhaps to 4% in April looks like a given.
There are some who will expect it to come down even earlier. If that is the case then how do bonds react? You are going to see a goodish amount of money going into bonds. The 10-year yield, which is now at 6% or thereabouts, can easily go towards the 5% mark. If the repo rate goes to 4%, then actually piercing the 5% is also not ruled out and all this could happen even as early as in the first quarter.
Thereafter there could be some pressure because in the first quarter of FY10, there will be a huge amount of bond announcements by the government. We know that the government’s revenues will not pick up in the first quarter of next year. Revenues will still continue to be under pressure. But expenditure will be big. Fiscal expansion is very much on the cards. So, you are going to see a huge amount of government borrowing. With that kind of bonds coming into the market, perhaps the fall in bond yields will be arrested.
What could also arrest the fall in bond yields is later on in the year, if corporate borrowing picks up, which it will at least for AAA companies and then for AA companies, borrowing can pick up. Then there is definitely tightness in the money. You can therefore see the 10-year yield perhaps falling to 5%, maybe even lower some people think. But by the end of 2009, you will perhaps see it climbing back towards the 5.5% or maybe even the 6% mark.
So, basically that is the kind of curve that you can expect in the bond markets.
Here, now, is CNBC-TV18’s Commodities Editor Manisha Gupta on what to expect from that space.If there is anything that has looked as dramatic as the fall in our market, it has been the way crude has performed. Everybody was a bull on crude going into this year. Till the middle of the year, it looked like crude could touch completely phenomenal levels. But that has come off, and it has come off for many other commodities as well.
Commodities have taken a hit, but they have not died because all commodity bull runs have an average life of 15-18 years. The latest bull run that we have seen starting from 2001 really may have many more years to go.
Specifically on crude, it may have seen a bottom for now – USD 40 per barrel has held – and maybe you might see USD 40 breaching for the time being. But for most part of 2009, USD 40-USD 75 per barrel is where you might see crude prices trading within, because we have seen supplies cut down quite drastically. Most of the oil refineries and oil rigs also have cut down their production. So, you might be in for a supply shock for most part of 2009, the second half for sure, and that is when you would see support coming for prices. USD 40 per barrel or below should be a good strategy to start accumulating in crude.
The best commodity or the performer for 2009 really is gold because we have seen inflation concerns already starting to build-up. The various bailouts that we have seen from various central governments may lead to inflation and also to huge fiscal deficits and that would support buying in gold.
Also the US dollar weakness translates into buying in gold. Apart from that, lower interest rates from various central banks would give really less competition to gold. The immediate support for gold is at USD 750 per ounce on the lower side. USD 1,000 may easily be breached, which is the high that we saw in 2008. This is one area where your portfolio diversification really needs some judgement.
Base metals is another sector that has seen record highs in 2008. But at this point most of them are trading below their cost of production. This is one sector that may take longer time to come around. I think by mid-2009, you would be looking at selling in this sector because supplies are at multi-year highs, and demand is still not coming in, whether it is the industrial, manufacturing, auto, housing. All these sectors have done very badly in most of the developing countries, and demand is still nowhere to be seen.
So, it would be only by August or September 2009 where you would see some recovery in demand and some turnaround in prices. Till then, it is not such a good idea to buy base metals. So, shorting is the strategy that you can go ahead with in base metals.
Vivek Law, National Editor, CNBC-TV18 on personal finance cues for 2009.2008 was a forgettable year for most people when it comes to their savings and investments. Is 2009 going to be better? What does every individual need to do as far as 2009 is concerned? There are two-three points here. The two silver linings that I see happening is that inflation seems to have been tamed. We are already in single-digit now for quite a few weeks. That trend is expected to continue. So, yes, that much less being eaten out of your savings/investment gives you a little more breathing space to an investor.
The second point is, we are likely to see far better returns on debt instruments both from the mutual fund route or directly and that is largely because we are going to see interest rates coming down. As you know, it is inversely proportional. The kind of returns that you get when interest rates fall, your returns go up. In 2008, we did see interest rates go up and therefore even the debt funds or the debt schemes were not able to deliver as much as they would have normally. We’ve already seen the cycle turning. A lot of debt funds are giving fairly decent returns at this point.
One of the instruments that a lot of the people park their money in, which was the Fixed Maturity Plan or FMP, till October happened, huge redemptions happened, Sebi tightened norms. My sense is 2009 is not going to be the year for FMPs. We are unlikely to see too many of them even being launched.
As far as debt mutual funds are concerned, it may be one good place to look at because over the next year, chances are that you are going to get pretty decent returns there. A fair amount of security because if you are looking at a gilt fund or a good balanced fund, that could perhaps also be a strong kicker.
I would imagine that there would be need for looking at some more asset classes in your portfolio. Property could be another good bet because over the last year or so, most investors have been sitting on the fence in anticipation of prices falling. The general sense is that there has already been 15-25% correction in certain markets; certain others are likely to see a correction in the first quarter perhaps of the coming year. Therefore property may be one more place, which you had actually put on hold, with interest rates going down as well, maybe one more area to look at.
So, while 2008 hasn’t been a great year, 2009 holds a lot of promise. But of course it is going to be even more imperative from hereon, as 2008 has taught us that you cannot just sit on your money, you just can not expend any energy in looking at it. It is imperative because in times such as this, you really not to be actively relooking at your portfolio, at your asset allocation, and that is going to be the way forward in 2009.
Source: Moneycontrol.com
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