TROUBLE FOR NOW ????

The markets across the globe took a severe beating. But in the last week our markets could bounce from 4700 level to 5100 level. The fall can be considered is from 5700 level. The DAX which is struggling to hold on the gains it made on the previous day. The same is the case with DOW and Nasdaq. This phenomenon is particular to these days but not to the history. The last one month scenario is not at all a consideration when we are talking about the LONG-TERM growth.

All the markets except the Nikkie are in positive zone despite of the turmoil’s they under went. The strength in the markets are not shaken by the Europe and US problems. The markets are apprehensive time and again about the recovery or growth prospects but they are not in bear grip. The bears are exhibiting their strength time and again when ever the opportunities arise. Their strength is well recognized in some sectors where the future is bleak. The Nifty is also traversing in similar lines as discussed above.

The third world countries of yester years are now the hub of growth opportunities, more safety heaven than the EU and US. The activity of patronage may exist for some time, until that inflection point, the FDI will get attracted in countries like India. The current situation in developing nations is the rising inflation which is eating away the growth made. To maintain a balance, attract more stable investments, the RBI and the Govt. are tying to take measures, may take some time. The food inflation now in double digit is causing concern for the govt. in power as they have to satisfy the common man. The aaum audmi khushi will offer KURSI.

The markets in India will get more support from FII as their exposure is increasing quarter on quarter. The mid caps will have good future after two years of consolidation. The telecom sector will see a better future than the turbulent one that exists amidst of spectrum allocation issues. The ADAG group stocks are the real barometer for the markets direction. The Reliance foray into broad band is so silent that the market is not able to digest. The LTE will see better future in India as the usage potential is more due to demographic advantage. The UID will boost the Governance patronage that propels the whole system.

The growth assurance can be taken from the studies conducted and targets set from BMW and Mercedes plans. The studies show that margins may fall by close to 6% due to tight liquidity in the system. These are contradictory to each other but in the time span on a longer scale both are correct. The policy changes at the Banking licenses to private sector will unleash a new area of banking and FII investment will follow. The same is the case with Insurance sector and retail. The huge investment opportunity for FIIs, those floods as inflow of funds into these sectors, waiting for more than two years.

The markets are now in the phase of consolidation. The bounce back of Reliance from 712 level to 812 odd level is a good sign for the bulls to celebrate. The sector rotation will take place in the next two to three months. The bargain hunter placed their bets in the market. The retail investors may take expose in October after analyzing the September results. The direction will be decided in November. The Nifty for now may face resistance at the current highs may slide to 4930-4887 levels and will resume the current uptrend. The ONGC FPO plan shall not become a show stopper.

THANKS TO ET FOR PROVIDING SUCH AN INTERESTING AND MUST READ ARTICLE.

Equity investment is an art as well as a science

Equity investment is an art as well as a science. The selection of an underlying is an art and selecting the right strategy to participate is a science. Clients often ask us: 'How do I participate in equities? Markets are near all-time high. Should I invest now or wait for the markets to correct? There is a lot of uncertainty in the markets', etc. 

My reply to them is that equity markets are always going to be uncertain, that there will always be volatility. But that is why equities give higher returns than other asset classes. Play smartly and take the benefit of volatility. 

The objective of every investor is to buy low and sell high or invest more when the markets are low and invest less when the markets are high. This often sounds simple but in reality it is practically impossible to time the market. To achieve the above objectives, I suggest the 'value averaging strategy', as it smartly plays out in different market conditions. 

Let us first understand what value averaging is. It was developed by former Harvard University professor Michael E Edleson. The value averaging investment plan is a powerful investment concept that provides considerable safety from market volatility, discipline and reasonable guarantee of returns. It is an averaging technique where the portfolio's balance increases in a defined way irrespective of the market movement. 

In a value averaging investment plan, the amount invested each month is not fixed, but varies with the fluctuations of the market. Investors have a target portfolio value that they desire over a certain period of time. With each passing month, the plan adjusts the next month's contribution as per the relative gain or fall of the portfolio value from the target portfolio value. When the market declines, the investor contributes more and when the market goes up, the investor contributes less. This way the anticipated return remains more or less constant for the investor. 

To check the superiority of this logic, we back-tested the value averaging concept in three different market cycles, ie, a falling market, a flat market and a rising market. We have considered a three-year analysis for each market cycle. We assumed 15% as the target return from equity and set the formula accordingly. Let's evaluate the investment results in different strategies: 

During the global crisis of 2008: For our analysis, we took the data for Nifty from December 31, 2007, when the Nifty was 6138. It fell all the way to 2524 on October 28, 2008 and come back to 6134 on December 31, 2010. So, there was in effect no returns from Nifty for three years. In the same time period, the value averaging concept (VAP) in Nifty generated an internal rate of return (IRR) of 25.34%, compared with the 0% CAGR return from a lump sum investment in Nifty and IRR of 23.86% from investments through a systematic investment plan (SIP). 

Falling market analysis (tech meltdown): For our analysis, we took data from January 31, 2000, when the Nifty was 1546 and fell all the way to 1041 as on January 31, 2003. Nifty lost 32% in the above period. If anybody would have employed the value averaging strategy for investment, the returns would have been -4.24% IRR as compared with -6.69% IRR through SIP and -12.33% CAGR in case of lump-sum investment.

Rising Market analysis (dream bull run): For our analysis, we took data from December 31, 2004, when the Nifty was 2008, to December 31, 2007, when it touched 6138, generating 195% absolute return, ie, 43.43% CAGR. But with the value averaging strategy (VAP), the IRR would have been 52.48%, and for SIP strategy, the IRR would have been 50.89%. In a constant rising market, the absolute returns from lump sum would look better. 

Conclusion: Value averaging as an investment strategy is superior to the systematic investment strategy as it combines the benefits of relative valuation due to market movements and a disciplined investment approach for averaging. In the current state of directionless market it makes sense to apply this investment strategy for allocation in equities. Just be patient and give more time to your investments. 

(The author is Group CEO, Alchemy).