Wednesday, May 26, 2010

European Crisis: Market Volatility and Opportunities

As the title suggests, Market volatility brings us very good opportunities which we will not get otherwise. If we track the stock market history in the past, one or other bad news dragged the market down when pundits were more hopeful about the bull market and this time is no different. The latest “financial bomb” came from, again the so called “Developed” countries and the difference being the region, which turned out to be Europe.

In the name of infrastructure building, all these western countries pile up the external debt to unimaginable levels and then they try to plug that debt by either printing currency or again by external debt. It is really funny that they boast of their standard of living and annual per capita income of $25,000 when the country they belong to is in the verge of collapse. Please see below for the external debt level of few important “trouble makers”.

Luxembourg – 38 times the GDP (For every 1 Euro GDP they have 38 Euro Debt)
Netherlands – 4.7 times GDP (470%)
United Kingdom – 4.2 times GDP (420%)
Switzerland – 2.7 times GDP (270%)
Belgium – 2.6 times GDP (260%)
Portugal – 2.2 times GDP (220%)
Spain – 1.7 times GDP (170%)
Greece – 1.6 times GDP (160%)
United States of America – 0.98 times GDP (98%)
India – 0.18 times GDP (18%)
So, most of these countries have huge external debt. I have highlighted Greece and India to see the Paradox (Greece has less external debt than most Euro economies). Rich Countries have huge external debt and a country that is being termed as "Developing" has less debt and in fact nothing when compared to western countries. My argument is if we deduct the per capita debt from the per capita income of these western economies then I suspect they are no better than people in poor countries in terms of wealth! Among the large developed economies, USA is in much better position in terms of externeal debt compared to European counterparts not withstanding the recent credit crisis.



Why Greece?
If you look at the above facts, most of the large economies in Europe have higher external debt than Greece. Then why Market is in fear of Greece? As I read and understood somewhere, Greece has the habit of cooking the books and I am not sure if Ramalinga Raju took training from them or they took training from him as Greece manipulated the books way back in 1994. So, any bad news in these times will pull the market down. Some of them are genuine and some of them are silly. For example, no one knows what the underlying truth with Greece is. If they default, then it would be pretty bad and I see some reason for people panicking. But if couple of policemen roams in the North Korean border, I don’t know why people should sell stocks. I thank Bush for spreading “Bush Mania” to the world as he was the one who went to Iraq war to eliminate Saddam for having few fire crackers. It is good that he did not know about Sivakasi and our Fire cracker industry. In fact we send “Rockets” during Diwali that could hit either Washington or Alaska. Anyways, against this backdrop I want to air my views regarding the stock markets and what strategy I follow.

Market Volatility

For anyone who believes in Fundamentals, Fundamentals of Indian economy in General and Indian Companies in particular are strong and most of the companies have announced robust growth and quarterly numbers in spite of the bad global scenario. So, the downside we see in the market has nothing to do with domestic issues. Foreign Institutional Investors are dumping the stocks and that’s coupled with reduced inflow of money will bring down any market let alone Indian market. No one knows what is going to happen. All the talk of SENSEX at 9000 or SENSEX at 22000 will get breached when investors panic. What I mean from this statement is, finding either the peak or bottom is next to impossible. All these “Experts” throw some numbers and 1 out of 10 gets a correct call purely based on luck. May be we can give credit to him for his assumptions based on which he predicted that. Talking about current situation, Market can go down from here or go up from here or stay where it is. This can be a bottom or the bottom will never come. Only thing that we can surely tell at this point of time is India in 2015 or 2010 is going to be much more developed and stronger so do most of the companies. So as a prudent person I would think that Investors (Both Foreign & Domestic) will be hard pressed to invest in Indian equities and SENSEX will be definitely higher than what it is today. At what level? I wish I know that. It can be at 22000 or it can be at 30000 or it can be at 40000. Anything is possible. The sure thing is our returns will be very good in 5 or 10 years down the line if we invest in good companies now and continue to invest in those companies prudently taking advantage of the market volatility.

Companies that are Relatively Cheap

Again we can tell only relatively whether a particular company is cheap or not as we do not know what price is cheap for a particular stock with 100 % accuracy. So, my strategy here is to select “relatively” cheap stocks and invest now. If the market goes down, I will continue to average as long as the company is announcing good results. When we do that, we lower the average cost price and increase the number of stocks and the result will be known when the stock market rebounds. I am listing below some of the stocks that are relatively cheap now which can be considered for Investment.

Note: Again I am listing the companies that are cheap now as there is no point in investing in HDFC kind of companies that are already expensive.

Infrastructure


GMR Infrastructure
Jaiprakash Associates
IVRCL Infrastructure

Education

Educomp Solutions
Everonn Education

Finance / Brokerage

Mahindra Financial Services
GIC Housing Finance
Yes Bank
South Indian Bank
Indiabulls Financial Services

Power

CESC
Adani Power
Reliance Power


Retail / Home Appliances

Aditya Birla Nuvo
Shoppers Stop

Real Estate

Indiabulls Real Estate
Anandraj Industries
HDIL

Others

Gitanjali Gems
Rajesh Exports
Hanung Toys and Textiles
Ahmadnagar Forgings
Arshiya International
Fortis Healthcare

Please add your observations in comments.
Kumaran Seenivasan

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This is a blog about stock market investments, investment strategies, and related topics. Any statement made in this blog is merely an expression of concerned authors opinion, and in no case should it be interpreted as an investment advice to buy stocks, sell stocks, or for that matter advice for any other issues be it money related or not. By using this blog you agree to (i) not take any investment decision, or any other important decisions based on any information, opinion, suggestion or experience mentioned or presented in this blog (ii) verify any information mentioned here, independently from your own reliable sources (for e.g. a registered investment advisor) and thereby check for possible inaccuracies. This blog is to create investment wisdom among general population and the authors are not responsible for
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