GalaTime

You’ve got to hand it to the market when it comes to fooling investors - the Sensex dropped from 10,350 to 10,200, leading many to believe that the budget’s impact on the markets was going to be negative, only to turn around and notch an all-time high of 10,420!

This is even more apparent if you look at intra-day trading in ITC. The stock dropped from 167.5 to 162.5, in conjuntion with “bad” news about tax increases on cigarettes, etc. But then, it turned around on heavy volume and zoomed to 176, a 52-week high!

PS: Also, check out the Securities Markets section of the 2005-2006 Economic Survey (full PDF via Business Standard); thanks to Ajay Shah for pointing this out.

PPS: On a somewhat unrelated note, here’s excerpts from an interview (download MP3)with John Bogle, founder of Vanguard funds. If only there was something comparable in India, mutual fund investors would be so much better off.

Check out Trader Mike’s analysis of the India Fund (IFN) charts. He’s bullish but also cautions - “My one concern is the volume action. I like to see stocks making and/or approaching new highs on strong volume. If it does make a new high on low volume that could be a sign of a head-fake in the making.. “

IFN is managed by the Blackstone Group; per it’s fact sheet, the Fund employs both quantitative and fundamental analysis and has over $1.2B in net assets. Fundamental analysis relies heavily on direct discussions with management both in the U.S. as well as during frequent trips to India. In addition, having an on-the-ground research team in India allows a broader and deeper coverage of the market. Quantitative analysis involves the use of both asset allocation models and bottom-up stock screening models.

A look at the fund’s holdings (as of Dec ‘05) shows a heavy concentration of the Sensex/Nifty large-caps: 

Finance & IT are the favored sectors; while pharmaceuticals are noticeably absent from both top-10 lists:

Before investing, keep in mind that the fund is currently trading at ~30% premium over its net asset value (NAV), signaling that it’s quite popular among investors.

The monthly bulletins put out by the Reserve Bank of India (RBI) are a must read for investors - at the very least, review the Q3 update on Financial Markets. Here’s some charts that aren’t easily available anywhere else.

A flattening yield curve:

Nifty-50 P/Es lower than Sensex-30 P/Es: 

Consumer durables remain strong, PSUs lag behind: 

FIIs are back with a vengeance since Nov ‘05: 

And if you thought Indian investors had it good in ‘05, just look at Egypt! 

I figured it would be worth our time to see how the Nifty-50 stocks have performed so far this year, as compared to their performance in 2005. Here’s a X-Y scatterplot of 46 stocks - I had to drop 4 due to lack of clean data (Jet Airways, Hindalco, Reliance Industries & ITC).

Among the highlighted stocks, note that Ranbaxy has shown the best improvement in performance year-to-date, while Punjab National Bank is the new laggard. Also note the strong performance of capital goods sector in both years (ABB, L&T, BHEL) as well as Bajaj Auto’s bull run. The tabular version of this data is shown below:

Reader Manas asked: “I would like to know if this is the right time to invest in gold as an investment. Or should i wait till the budget.”

First, this is a fairly short-term horizon, and I doubt that the budget will have a material impact on gold prices. However, I’m no gold expert, and to approach this as an investment, let’s look at what does affect gold, in the Indian context:

* Exchange Rates: Concerns about weakening of the rupee (versus other currencies) triggers an increase in gold investments. This requires us to analyze (and make assumptions) about future exchange rate movements.

Currency traders must have noted the recent move inthe INR:USD rate from 44 to 44.6 - this is most likely triggered by the differences in “real” interest rates in US & India. With the US facing inflationary pressures, if the US Fed continue its tightening policy, expect the rupee to weaken further to 45/46. Of course, if the US Fed stops in mid ‘06, and the RBI starts tightening, the rupee will climb back to the 43/44.

* Inflation: If inflation shoots up in India, investors use gold as a hedge against devaluation of their rupee investments. For now, inflation seems to be in control (below 5%), except for oil prices.

* Jewelry demand: This factor is uniquely important in India, since gold jewelry consumption is quite high. Typically, seasonal factors kick in, with September/October (post-harvest) and December/January (marriage) as the peak months of demand.

Over the coming few months, none of the above factors provide a strong bull OR bear case for the metal. Of course, there’s always one factor that can exert a strong influence - speculation! A look at gold charts shows that the price hasn’t been able to stay above Rs 8000 (per 10gms) for too long; however, it has had a tendency for rapid moves - both bullish moves (6000 to 8000 in 4 months) as well as “trend reversals” (7200 to 8100 and back to 7200 in 1 month).

Bottom-line: Determine what percentage of net assets should be allocated to gold. For me, 3-5% is reasonable, mainly as an inflation hedge - this can always be adjusted upwards if inflation concerns start cropping up. Also, if practical, I would buy it in multiple installments over a period of few weeks, thus avoiding the need for “market timing”.

Personally, I prefer to stay away from bets made on the outcome of events such as elections, budgets, etc. Markets can exhibit extreme volatility during such times and you need to be very sure of your “edge” before placing your trades.

Having said that, its worthwhile looking at how the stock markets have responded to the annual budget. Ravi of the Graham-2-Livermore blog does exactly this - he’s found that “a month after the announcement of the Union Budget, the benchmark indices (BSE Sensex and NSE Nifty) closed below the pre-Budget levels on eight of the last ten occasions.”

Continuing today’s link-fest, here’s a research article on how “stock returns in India increase strongly with both market cap and P/E, and decrease strongly with dividend yield.” Follow that with Ajay Shah’s concerns about the data used to arrive at this conclusion.

And thanks to Ajay for this link as well - “Hedge Funds Bring Capital, Anxiety to India“. Some excerpts:

- 48% FIIs in Indian markets used offshore participatory notes, the only instrument legally open to hedge funds, compared to 35% in Feb ‘05 and 26% in Sept ‘03.

- Hedge funds were holding between 516 billion rupees ($11.7 billion) to 688 billion rupees in Indian stocks as of Jan ‘06.

The National Stock Exchange (NSE) in India publishes a monthly newsletter that has fairly detailed statistics on all aspects of the Indian capital markets. For example, here’s a few graphs extracted from the Dec ‘05 edition.

First, a bird’s eye view: total market capitalization for the cash, debt & derivatives markets. Note the 40% jump in trading value for the cash markets from Nov ‘05 to Dec ‘05.

Next, a look at how much influence the top “N” stocks exert on the overall market. The top-100 stocks accounted for 82% of total trading volume - this shows how lopsided things can get, and the need for caution while using metrics such as Advance/Decline ratio.

Next, correlation analysis to see how closely the S&P CNX Nifty-50 index tracks world markets. It seems that the strongest correlation is with the Singapore STI & the London FTSE indices.

Which brings us to the last graph - monthly data for Advances, Declines & the A/D ratio. Note that this table also provides daily data for the most recent month, in this case Dec ‘05. Note the sharp drop in Jan ‘04 and the jumps in Nov ‘04 and Oct ‘05.

And this is just a fraction of all the data in the newsletter! Definitely a valuable resource for all traders & investors.