Indian markets to be safe haven for investors in '08

India's stock market, one of the world's most expensive, is likely to be a safe haven for investors in 2008 because of the economy's low exposure to slowing global growth.

Global investors should also be overweight Chinese shares, though less so than in 2007, as well as Hong Kong issues, while going underweight South Korean and Taiwan markets.

India will fare better than more trade-dependent economies as US growth slows, noting exports of goods and services account for about a fifth of its gross domestic product, compared with 40 per cent for China.

"Its valuations look steep, and it's a crowded trade ... but it's the nature of lifeboats to get crowded. And there is some merit to the idea of India being seen as one now."

"It can remain in a protracted expensive valuation zone because there's not enough reason to sell it."

Investors need to build long-term portfolio - 2

What aided the rally, of course, was the relentless fund flows from global investors who now have fewer exciting markets besides India.

It was the same investment community which hammered the stocks though there was also enough support from the local traders who had built positions beyond their capabilities. As a result, the super profits of 2007 disappeared in a matter of two trading sessions.

Though local mutual funds and institutional investors did their shopping, it couldn't stem the negative pressures on the market.

With foreign institutional investors (FIIs) still preferring to book profits and keeping away from Dalal Street, one wonders whether the equity story has lost its steam.

Investors need to build long-term portfolio - 1

Finally, the equity market has come under selling pressure and when it happened, it wasn't a pleasant scene.

In the first two trading sessions, the markets went into a selling mode as if there was no future for equity and though there was a mild recovery in Wednesday's trading, the under current was far from comforting.

While the short-term trend continues to be volatile, the time has come for investors to go back to the basics of investing

For a good part of 2007, this was completely forgotten, as the index had turned a sprinter by adding 800-1,000 points in a matter of a few days.
In 2007, big rallies were to the tune of 600-700 points in a day's trading and the Sensex rallied from 17k to 19K in a matter of few trading sessions.

Structure of IPO market -2

There is ample room for modifying the current system of book-building which is neither realistic nor reflects investor sentiment towards an IPO. This is an eyewash that does not serve the cause of the larger section of the market.

The IPO market infrastructure should be revamped, including the book building process leveraging the secondary market infrastructure. The listing day volatility can be substantially brought down if the price discovery process is made efficient and the delay between the closing date and the listing date is reduced.

The extreme volatility in a newly listed stock is mostly the creation of retail investors and speculators.

Since that is the case, the book building process should cover the responses from retail investors also to arrive at a price that truly reflects the market sentiment. The current practice of consulting only Qualified Institutional Buyers (QIBs) for the price discovery of an IPO is thus not realistic.

Structure of IPO market -1

The price band for an IPO need not always be the right remedy to bring down high volatility on the day of the listing, as well as on the few days thereafter. One needs to look at the structure of the IPO market in its totality to solve the issue on a long-term basis.

First and foremost, all institutional investors should be paying the full amount of the application as in the case of a retail investor. This will solve the psychological impact of communication on retail investors being associated with the number of times an issue is oversubscribed.

Then one could assume that it is all risk capital that is invested in the IPO and that it is fully paid on the part of the investors. In such a scenario, there is probably a case for using the stock exchange margining system appropriately, to provide a safe landing situation to an IPO in the secondary market.

Today, the speculators, particularly at the retail level, try to grab a newly listed stock after paying a relatively small margin or through the margin funding route of the stock exchange.

Public Offering Market Booming in India

India's booming initial public offering market is set to grow further in 2008, but issuers need to be more realistic about valuations to ensure the party goes on.
As long as issuers demonstrate more restraint in terms of valuations and pricing expectations, I think deals can get done.
"The challenge is that there is a lot of exuberance in the minds of issuers and that is where correction is required," Companies in India are expected to raise up to $15.8 billion from new listings in 2008, almost twice as much as last year's record $8.3 billion, according to data from Thomson Financial.
The Indian stock market has been on a five-year, record-breaking bull run partly driven by foreign funds attracted by strong domestic economic growth.
Volatility has however picked up, with the index posting intra-day falls of more than 10 per cent on two days last week before rebounding to end a turbulent week down 3 per cent.
Value was beginning to emerge in Indian equities, with the market trading at a price to earnings ratio of about 17 times for the year ending March 2009.
"These are pretty healthy levels and from a longer term point of view, the correction is making markets more robust for the future."
Indian billionaire Anil Ambani's Reliance Power last week raised $3 billion within a minute of opening. The issue, India's biggest initial public offering, attracted bids worth a total $190 billion.
"I think the message from the markets to investors in general, and issuers, is that we have got to make sure there is an element of realism in the middle of exhuberance. Back to basics,"

Get your timing right(part-2)

The past seven years' date-wise trend of the Sensex and major equity funds clearly suggests that between the 23rd of a month and the 2nd of the next month, the Sensex is lower than during the balance period.

The reason, to some extent, can be attributed to the expiry of futures contracts on the last Thursday of each month, which can lead to selling, to close positions in the market.

Once the futures expiry is complete, the market starts consolidating again, inflating the Sensex and NAV values.

We observed the NAV behaviour of four equity funds - HDFC Top 200, Reliance Vision, Pru ICICI Growth and Franklin India Blue-chip. As is evident from the adjacent table, the NAV trend for the mutual funds under observation is similar to the Sensex trend. This indicates that an investor planning to go in for a SIP has to understand the trend and then take the plunge.

The trend in the years prior to '03-04 is similar to that of the Sensex. In all the earlier years from '00-01 to '02-03, investors would have made a saving if they had invested between the 23rd of the month to the 2nd of the next month. So, plan well and make sure to maximise your returns!

HOW DO SIPs WORK?

SIPs work on the premise of rupee cost averaging. Even seasoned investors find it difficult to predict the ups and downs of the stock market. Hence, the best resort is to go in for a disciplined way of buying units on a monthly or quarterly basis.

By doing so, investors can avoid the temptation of timing their investment. 'Market timing' is an activity that is best left to professionals. Moreover, the way to weather market cycles is to invest throughout the cycle, so that the investor automatically ends up buying more units at lower NAVs and lesser units at higher NAVs. Therefore, on a net basis, investors will be able to average out their unit costs over a period of time.