Stocks in the Emerging Markets

Most people from the developed countries buy into Emerging Markets stocks that are blue chips.

That's where they make the mistake with respect to getting a good return. This is because their curves are already levelling off.....MAKING MONEY ON STOCKS IS ALL ABOUT UNDERSTANDING GROWTH CURVES.

That's why these guys end up not making much.

The problem lies in not doing proper research into what lesser known companies might offer them fabulous returns. Look at Infosys in its beginning...did anybody know its name ? Did anybody invest in it ? Now it's trading in the Dow Jones.

The trick to making huge returns lies in investing into very small companies that have good promise.

Predictions coming true…..

So, my predictions about the SENSEX are coming true.

If you read my blog posted on January 15, it was 14,200 then & I was skeptical, though people were gung-ho about it climbing to around 15,000+.

15,000+ ? Forget it….it started today from about 12,450…it has climbed some 150+ points, I believe.

But where does it leave us?

There was a steady erosion of 15%….and I wouldn’t be surprised if sometime in next 1-3 months it drops again by some 2000 points or more.

Right now, you have 3 major factors looming in front:

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1. Upcoming political instability after U.P. elections……UPA govt. is jittery.
2. Globally “overheated” markets, FII’s might withdraw money in a jiffy.
3. “Poor judgement” in lending by sub-prime brokers in the U.S., causing panic globally

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Infrastructure Disparity will lead to Market Crash

One of the main leading reasons, IMHO, that will lead to the coming crash in the Indian stock market crash is, what I call – infrastructure disparity.

What do I mean by it?

I’ll give you examples :

India places the greatest value on building up software parks…..
….but it lags way, way, way behind in basic stuff like health services. (& this includes even the best of hospitals).
India is rapidly building up its telecommunications backbones
…..but it has one of the world’s poorest road network.
India’s services sector is growing rapidly…..
……..but red-tape & bureaucracy is a hindrance to the entrepreneur.
I can offer you scores of anomalies. The Indian politicians still do not care a bit to IMPROVE the infrastructure. In some cases, INFRASTRUCTURE HAS TO BE BUILT FROM SCRATCH.

So, what does it translate to?

If the “real infrastructure” is not strong enough, the GDP suffers.

For example, how can you really build up mass-scale retailing if the road infrastructure is weak? How can you effectively buy raw or half-processed materials at cheap price and transport it fast to the place of manufacturing ? So, obviously, the inih-up retail price will be more.

And the Indian GDP is a bit “artificially” inflated due to the services sector growing at a blistering rate. So, the “real GDP” rate is moderate. Which is why, the stock market LACKS CONFIDENCE. Which is why the market is whimsical.

And this is the reason Merill Lynch, S&P, etc. caution lobal investors time & again to exercise caution w.r.t. the Indian market.

BUT THEN, YOU HAVE TO REMEMBER….. A MARKET THAT IS WHIMSICAL OFFERS OPPORTUNITIES TO MAKE MONEY FAST.

Indian Stock Market......the COMING CRASH

If you are an investor interested in the Indian market, don’t buy now. Wait for the NEXT CRASH, which is coming. After the crash, invest into some SENSEX or NIFTY mutual funds, besides some sector mutual funds.

Now, why am I in the minority, talking about an impending crash? Let me go into details of my reasoning.

“Sharp falls” in the SENSEX or Nifty are, UNLIKE in Western or Far East countries, in majority of cases, UNRELATED to economical factors. In India, factors like political changes, market hype, internal business feuds, rumours, etc. play a big part.

People buy & sell in hordes. Now, it is not necessarily triggered by them. Last crash in May 2006 was, according to the opinion of many, INITIALLY due to FDI & FII selling. But, ultimately the landslide was mainly due to we, the investors, panicking.

In fact, I, too, panicked. When it slid from 12600 to 10200, my friends told me, “ Mr.Mukherji, what are you waiting for? You’ve already lost 20%, they say it’s going to touch base at 7000, or even 6000. You’ll go bust.”

I did panic. I did make the mistake of offloading 25% of my portfolio. But then, I made it up later. It went down to around 8800, as far as I remember. And today, it’s at 14,200 in 7 months. Which means a climb of around 60% in 7 months ! I won’t be surprised if it touches 15,000 in the next 2 weeks.

But, I’m waiting for the next crash. It’s a ‘coming, fellas.

Now, why would that be???

It’s a culmination of many factors :

1. Oncoming political instability after U.P. elections.
2. “Over-inflated” stocks
3. Overseas acquisition by steel majors not living up to expectations.
4. Over-heated IT stocks.
5. Petroleum stocks can face problems due to wrong geopolitical moves.
6. Possibility of a global mini-recession.

7. Flight(temporary ;-) of foreign investment to other emerging markets.

And lastly, you can add that cardinal sin : GREED. I know people who entered at 13,000 & invested probably half their wealth in the stock market. As they suffer losses, there’s going to be rumours, which will fuel panic.

And panic will lead to further crash.

Globalization = Infinite Opportunities

With globalization, we are moving more & more towards 1 World, 1 Market.

Yet might seem intimidating at first sight, but it does mean more prospects. Proper use of IT can land you a wealth of information, but the crux of the matter lies in PROPER ANALYSIS.

Let me shower you with some data & analysis.

You are more or less satisfied with the US market. But should you stick with it for 5 years with 90% of your portfolio invested in it? IMHO, it’s not a wise decision. It’s the market most prone to terrorist attacks, in the scale of 9/11 or even greater. Such an event would severely erode your stock values. Besides, you can factor in other stuff like major changes in foreign policy after the Dems come in 2008 + the fiscal deficit + the rise of the Euro + Chinese “flooding” + overdependancy on foreign oil + a zillion other threats, which I’ll itemize in my later blogs.

The other day, somebody asked me, “ Tamal, I’m going to buy some index mutual funds in India. You think it’s O.K. right now?” Well, this is just the wrong moment. The Indian markets going on a bit of hype right now, so I told him to wait for the next big correction. And I mean BIG. Like the SENSEX should fall to at least 11,000. It could even go below 10,000 once again. That’s stupid, you think ?

Think again. Nowhere does the maxim of Warren Buffet’s market guru Benjamin Franklin : “Mr. Market is a neurotic person” hold so true as in India.

The Chinese market seems better than the Indian market. So, as an overseas investor, should you invest in the Chinese market on a long term? Nope. Because besides being a controlled economy, remember the market’s all about PERCENTAGE OF INCREASE. China will be leveling off.

The other day somebody told me “Do you think Japan is a spent force, Mr. Mukherji?” This NRI was thinking of buying some Japanese penny stocks especially in the finance sector. He had no idea of their record forex reserves + gold reserves + their strategic real estate holdings.

Buy euro or bullion ? Which is better in a stable economy, and which is better if there is a conflict with Iran?
Buy real estate in Calcutta or the NCR?
Should you set up a textile manufacturing unit in China or in India ?
If you’re thinking of “outsourcing”, is India really the best choice or are there some other countries you still haven’t thought of?

I’ll be analyzing infinite scenarios in my later blogs.