Outlook for the month of March

• Markets not showing any signs of resilience and lacks sanguineness.
• Expect 15-20% earnings growth this fiscal year.
• Valuation multiple may come down a little bit by the year end.

• Concerns:

1. High crude oil price
2. Foreign flows
3. Inflation

• Beginning of 2010, we had rising inflation, so central bank had done much work on rates, the current a/c deficit was widening. Now in 2011, it is likely that current a/c deficit will narrow. Across Asia, no central bank has worked so extensively as ours. So, the rates are almost normal and inflation has peaked out well.

• The tricky thing is, what is happening in the world- at the one end of the spectrum you have Europe still struggling with its debt problems and at the other end you have US surprisingly achieved a lot in the last 2 months. QE 2 happened and got some consensus on the tax breaks, for which now on the street arguing for higher US growth.

• This will lead to rise in commodity prices, which could create an issue for India. How?

US growth rates accelerates, crude oil prices rise and to that extent it does upset India’s macro balance.
If oil prices got to $110-120 per barrel then things looks a bit worrisome for India.

• India is trading at about 35% premium on the forward multiple to emerging markets. So, it is slightly on the richer side. So that multiple may come off a bit.

• Consider if a bull case, 30% upside if crude oil prices remain range-bound say, $80-100 per barrel.

• In 2011, focus may shift to developed world than emerging markets, so these countries will have to deal with inflation, because developed world export inflation into emerging markets. If one closely observes can say, “Developed stock markets respond to growth and emerging stock markets respond to rates”.

• But talking about India, it is actually quite nicely perched because, India has already done its work on rates.

• India attracted $29 billion in 2010 and now in 2011?

We will need lower flows because the current deficit is shrinking. For September data, it stood at 4% annualized, in terms of flows means, we need $50 billion to fill that hole. And definitely this deficit is going to reduce for 2011.

• In fact, 2 factors drove this deficit,

1. Negative real rates
2. High level of fiscal deficit

Now these 2 are receding, so a contraction in this deficit. And to that extent, savings rate in the economy will rise. So, the current a/c deficit will decline.If one excluding an assumption of a runaway crude oil price, probably flows will reduce from $50b to $35-40b
For 2010, these flows were largely in the form of FII, but this year, can expect a mix of FDI and FII

• A lot of people see inflation peaked out but the pace at which it will decline is not sure. This may become a wild card for the coming 6 months.

• Actually, there is a genuine problem with food, because of structural factors, less to do with cyclical factors. It is well known about India’s protein consumption, which is going up, so all the protein basket like milk, eggs, poultry, meat and soya bean are experiencing huge demand for this the prices of these items are elevated. And some of these items prices were anchored at higher levels. So, any shortage in particular food commodities will be leading to higher levels. So, this year we will see some base effect in terms of growth of inflation and interest rates rise. So to that extent, I do think that consumption will slow. A mix of growth in India will shift from consumption to investments.

• We have seen 2009- a great year, 2010- a tepid year, 2011- expecting a range bound

• Other indicators:

1. Credit growth:- need to assess whether banks are pulling back on credit
2. Fuel subsidy:-

• On financial companies?

A reason to under-performance, which was a star performer in 2010
1. These institutions were too bullish, so ownership levels had earlier reached record levels. So valuation got rich;

• On IT companies?

In 2010, there was a skepticism that developed markets struggling, will lead to domestic IT companies struggle. But it was so wrong because what happened was when developed markets struggled, companies in the developed world reacted by cutting cost very sharply and IT companies in India benefited. Going into 2011, the environment is actually looking better and the likelihood is that budgets will get marked up. So IT companies in India will continue to benefit.

• Sectors to watch:

1. Materials and energy

We can see a major shift from Financials and Consumers into global commodities and Industrials in 2011.

• Why Industrials?

There are triggers in place for a bigger CAPEX cycle, investors are highly skeptical about CAPEX cycle kicking in and Industrial stocks have been terrible outperformer except L&T.

• In 2010, investors have flocked to high RoE, high FCF and low-beta stocks and this will change in 2011.

• We need to keep in mind that there are not any domestic factors affecting the market on the downside. It is rather global. China has to work on rates. If they get it wrong, then it will hamper India's progress as well.

• Are we still in a bull market?

The basic tenet to say whether it is a bull market or a bear market, two things to consider:
1. Globally policy makers falter on inflation. Take US for example; inflation comes back much faster which causes yields to go up in America. It then creates a problem for US all over again. In that scenario, it becomes difficult for them to sustain quantitative easing with the fiscal deficit already high. It then creates a problem for US and spills over into the emerging markets.
2. Domestic policies may also go wrong.

Is this the end of greenback?

The greenback has fallen against the euro by nearly 15% since the beginning of the summer.

There are also reports that Gulf Nations shifting the pricing of petroleum away from dollars.

The real causes for further fall…..

American households are saving more in order to rebuild their retirement accounts, which will make the country export more. For this to happen, the American dollar should depreciate further to make American goods more attractive to foreign consumers.

Fewer foreign purchases of US assets again imply a weaker dollar. Now for their sophisticated innovations, that the Americans specialize would mean limited foreign capital inflows.

The question is…..

What is the benchmark: Weakness against what?

Certainly not against the Euro, where it is already expensive and is the currency of an economy with banking and structural problems that are even more serious than those of the US. Whole European Union is reeling under bank restructuring and Bulgaria will be the first to undergo a painful restructuring under the IMF guidance.

Then not against the yen, which is the currency of an economy that refuses to grow.

But, for the dollar to depreciate further, it will have to depreciate against the currencies of China and other emerging markets like India.

Outlook:

In the longer run, OPEC will shift to pricing petroleum in a basket of currencies. Generally, it sells its oil to the US, Europe, Japan, and emerging markets alike, so it hardly makes sense for it to denominate oil prices in the currency of only one of its customers.

The bottom line is………

The dollar isn’t going to be replaced by the euro or the yen either, given that both Europe and Japan has serious economic problems of their own. Maybe, the Renminbi is coming, but not before 2020, by which time Shanghai will have become a first-class international financial center.

Once this zero interest rates episode end, the US Federal Reserve will be anxious to reassert its commitment to price stability then there may be a temptation to inflate away debt held by foreigners. But the fact is that the majority of US debt is held by Americans, who would constitute a strong constituency opposing the policy.

The other scenario is that US budget deficits continue to run out of control. But high debts will mean high taxes. So with the combination of loose fiscal policy and tight monetary policy will mean high interest rates, sluggish investment, and slow growth.

Net-net, the emphasis on the need for the US to export more and on the greater difficulty the economy will have in attracting foreign capital are on the mark. These factors give good grounds for expecting further dollar weakness.

Marketing Strategy: Direct marketing is the buzz word that will gain a new clout

For instance, Danish beer is vying for a slice in Asia’s competitive Lager beer market, a beer stored from six weeks to six months for aging before use.

One will notice the gap between the seller (restaurant owner) and the buyer (customer) narrowed considerably, can see both meeting face to face. And this kind of promotion is useful.

Looking at the growth potential in the region, many more companies are seeking a marketing strategy to suit it, giving new clout to the ages-old tool of bringing products directly to consumers.

Now many more companies, from FMCG firms to delivery firms such as Fedex, are adopting direct marketing methods to sell their products at increasingly crowded markets.

Direct marketing, defined as, any sales technique from pop-up stores or commercial gift bag giveaways to free sample handouts making sellers directly in touch with target customers, compared to indirect marketing such as advertising, product placement or sponsorships.

Traditionally, Asian consumers are accustomed to do business with trusted family or friends to avoid scam. Here, we can see the traders’ ancient way of doing business with direct marketers as safe avenues.

Not to wonder, people still reply to direct mail in this world of E-commerce.

Across the world, majority of firms uses both direct and indirect marketing, with the direct portion growing.

Due to expanding markets such as India where Direct marketing is much prevalent has seen last year direct sales increased 1.25 percent, up from a 0.4 percent increase in 2007, according to data from market research firm Euromonitor International.

Much accredited sectors in Asia's direct marketing are alcoholic beverages, delivery firms such as Fedex with pre-existing address databases and common household goods sold by the likes of Amway.

Apparently, Direct marketing costs far less than mass advertising -- and marketing officials say gives them more bang for their buck.

Online advertising may be a cost effective measure for marketing, but depends on the geography. For example, Sri Lanka Apparel reached 100,000 customers beginning with 300 customers, spending only $150,000, by joining online communities such as student activist groups and the same outreach via conventional advertising would have cost at least $20 million.

Almost 70 percent of consumers in Bangladesh and Sri Lanka bought something in a door-to-door sale last year, according to a study.

Talking about India, taking advantage of the popularity of door-to-door sales in India, 10 years ago Hindustan Unilever Ltd began a direct-sales scheme in rural areas with populations of less than 2,000. About 100,000 villages are involved. Some 45,000 women go door-to-door with Unilever hair oil, soap, shampoo and cream in baskets or cardboard cartons on bicycles. And the turnout to the surprise, they bought Unilever inventory worth 4.5 billion rupees ($94 million) in 2008.

A boom in electronic marketing is expected as Asian consumers adopt the latest technologies faster than peers elsewhere and welcome ads via mobile phone messages or online communities.

About 60 percent of Internet users in the Asia Pacific region have made purchases based on e-mail advertisements, compared with less than half in North America and just over 40 percent in Europe.

Direct plus digital is growing, while conventional advertising is definitely not, in terms of budgets and activity.

Using 'Pivot points' in Day-trading

Who uses? Originally used by floor traders.

What it indicates? Some idea of where the market was heading during the course of the day.

Definition: The pivot point is the level at which the market direction changes for the day.

Using some simple arithmetic and the previous day’s high, low and close, a series of points are derived. These points can be critical support and resistance levels. The pivot level, support and resistance levels calculated from that are collectively known as pivot levels

Why so popular? The reason pivot points are so popular is that they are predictive in nature.

As one said that history repeats itself (sometimes rather).You use the information of the previous day to calculate potential turning points for the day you are about to trade (present day).

Calculations:

Resistance 3 = High + 2*(Pivot - Low)
Resistance 2 = Pivot + (R1 - S1)
Resistance 1 = 2 * Pivot - Low
Pivot Point = ( High + Close + Low )/3
Support 1 = 2 * Pivot - High
Support 2 = Pivot - (R1 - S1)
Support 3 = Low - 2*(High - Pivot)

If the market opens above the pivot point then the bias for the day is long trades. If the market opens below the pivot point then the bias for the day is for short trades.

The three most important pivot points are R1, S1 and the actual pivot point.

The general idea behind trading pivot points is to look for a reversal or break of R1 or S1. By the time the market reaches R2, R3 or S2, S3 the market will already be overbought or oversold and these levels should be used for exits rather than entries.

For example,

On the 12th August 09 the Euro/Dollar (EUR/USD) had the following:
High - 1.2297
Low - 1.2213
Close - 1.2249

This gave us:

Resistance 3 = 1.2377
Resistance 2 = 1.2337
Resistance 1 = 1.2293
Pivot Point = 1.2253
Support 1 = 1.2209
Support 2 = 1.2169
Support 3 = 1.2125

Pivot points can be used in two ways.

The first way is for determining overall market trend: If the pivot point price is broken in an upward movement, then the market is Bullish, and vice versa. Keep in mind, however, that pivot points are short-term trend indicators, useful for only one day until they need to be recalculated.

The second method is to use pivot point price levels to enter and exit the markets. For example, a trader might put in a limit order to buy 100 shares if the price breaks a resistance level. Alternatively, a trader might set a stop-loss for his active trade if a support level is broken.

Predicting interest rates in a volatality

Bond markets:-
Provides an early idea of the direction in which interest rates will move.
Yields on govt. bonds have fallen to a four-and-a half year low---- a clear sign that deposit rates will follow suit.

To a certain extent bond yields are determined by the extent of liquidity in the market.

Inflation:-
It is logical that interest rates in an economy should be higher than the expected rate of inflation.
If rates were lower, it would make more sense for the lender to purchase goods and sell them a year on.
If there is a situation of low interest rates and higher inflation, it is clear that something has got to give.

Yield curve:-
Interest rates go up along with the term.
A two year deposit should get higher rates than a one year and so on. If banks offer higher rates on long-term deposits, it is clear indication that they expect present high rates to be of a temporary nature, and that rate could go down in future.

So what does 2009 hold for interest rates? Clearly, there is slope for a reduction in deposit and lending rates.

However, govt. bonds have already priced in an interest rate cut. The yield on the 10-year govt. bond has fallen to four-and-a half year low of 5.5%.

Investment Guru’s basic fundamentals for tyro investors

According to Guru 1, look for companies who are good at Return on tangible assets.
According to Guru 2, companies which have great,

• Capital profile: what is its Capital investment—capital investment they need every day in order to grow their earnings.
• Working capital profile: Nestle and Lever has partly been able to get this kind of return on capital employed because they are able to squeeze their suppliers and they are able to sell everything on cash.
• Business superiority: In Bharati’s case it is marketing. From title also it is marketing.
  What Indian investor lands up doing is buying MNC stocks who have the worst corporate governance in this country. And Satyam is nothing.

According to Guru 3,

• It’s the cash flow which matters the most to the company and the investor too.
• Other important thing is capital allocation: many companies generate a large amount of free cash flow but they just blow it up. They buy fixed assets, they buy a building for themselves to live in rather than rent it. They invest in bonds and debentures; they find ways to deal with the cash flow rather than paying dividend.

corporate governance in India

This is a big issue in Indian corporate governance because one of the fallout I see is the corporate structure is not been respected and very large managements are also treating it as a proprietary kind of situation and they are not disposing off the earned income in a proper way. The kind of payout that they should have is not happening. They should learn from what’s happening in other parts of the world. We have the lowest payout in this country.

So much of corporate treasuries have been managed and even the laws are in favour of management of corporate treasuries where the treasury income is post tax more or less and the cost of fund within the corporate are pre-tax.

In the IT sector itself, you will find the companies which are well governed, which are transparent, which care for the minority shareholders at a much high PE multiple.

Solution accredited by Mohandas Pai, Head- HR, Infosys, is: “Auditing process should get more rigorous and that all companies should make sure that bank balance confirmation goes directly to auditors”.