Prajna Capital - An Investment Guide

A RECESSION can be loosely defined as a slowing down of the activity in an economy or when the economy enters a phase of negative growth . Since the GDP is a measure of the economic growth of the economy, a technical definition of recession would be a decline in the GDP growth of a country over two or more consecutive quarters of a year. This is very often accompanied by a fall in the stock markets. Many experts feel that a recession is a part of a normal business cycle after a period of growth and feel that it could last anywhere between 6-18 months. During a recession, there is generally a lowering of interest rates in order to pump liquidity back into the economy. The line between where recession ends and depression begins is often debated. However, most experts feel that when the GDP has fallen by over 10%, then it can be defined as an economic depression. There are, however, many who feel that GDP is not the only indicator and hence they look upon employment, industrial prod...

VALUATION of insurance companies is back on the regulator’s radar. The insurance regulator Irda is on course to develop commonly accepted benchmarks and disclosures to value insurance companies, as this would be crucial when Indian partners dilute their shareholding from 74% to 26%. The present regulation requires Indian promoters with a majority shareholding to dilute their stakes through an initial public offering ( IPO ) at the end of the tenth year of operations. The value of insurance companies hinges on several assumptions, which could result in wide variations. It is different from valuing, say, brick-and-mortar companies listed on the stock exchange. Their valuation is generally based on the price-earning multiple — a measure of the price paid for a share relative to the profit earned per share. A high PE multiple suggests that investors expect higher earnings growth in the future. But this exercise is much more complex for insurers. Once an insurance company receives the premi...

With the economy expected to grow at 7.5 -8%, there’s no reason why a long-term investor should not enter the market at every fall THE continuous decline in stock prices over the last few months has adversely impacted corporates, insurance companies, financial services firms and mutual funds, amongst others. But these are players who, perhaps, have the wherewithal to withstand such declines. This may not, however, be true of the small investor — the individual investing modest sums for a house, daughter’s marriage, retirement and others. Should then the small investors rush for the sidelines? Or should they view this as a buying opportunity and plough more money into the market? A none too distant survey by an international management school had majority of the experts surveyed saying an emphatic ‘neither’ to the question. This being the consensus, let us ponder on how we can insulate the retail investor. These are not nuggets of wisdom which has remained hidden so far. These are the t...

DURING the past six months, the financial and economic scenario has undergone a sea change due to high inflation of nearly 12%, softening property prices after reaching astronomically high levels, reduction in gross domestic product ( GDP ) forecasts and consequent slower growth rate of the economy, political uncertainty, sub-prime financial crisis and slowdown in the US. In view of the above, let us review what investment strategies one can adopt. STOCKS The stock market is a reflection of psychology as well as earnings, dividends and asset value. The BSE Sensex is currently at 15,000 level, implying a price to-earnings ( P/E ) ratio of about 18 (with EPS of say Rs 850) and an earnings yield of nearly 6%. So, is this the time to buy, hold or sell stocks? This is definitely a difficult question to answer as no one can accurately predict the future direction of stock markets. Historically, a P/E ratio of 15 for the stock market is considered fair, implying a BSE Sensex of 12,750. Alth...

It is all about balancing growth and inflation. Like the Finance Minister said recently, " Inflation-control measures like drawing excess money out of the economy and the robust GDP growth cannot go hand-in-hand ". The matter, as it stands today, is how much growth should we forego to control inflation? The Finance minister is of the opinion that the government would not mind sacrificing GDP growth to some extent for controlling inflation. Hence, the focus of domestic and global policy makers has shifted from GDP growth or recession to fighting inflation. Global phenomenon Actually, this situation was forecast many months ago. It was a problem waiting to happen when the US Fed kept cutting benchmark rates repeatedly in the last nine months. Inflation has now become one of the biggest global issues. Soaring inflation, particularly in food prices, has moved to the top of the agenda for policymakers. The European inflation rate accelerated to 3.6 percent last month, the highest ...

While FY09 may be a crunch time for India, given the situation of a rising current account deficit and lower capital flows, the pressure could ease a bit from FY10 IT IS difficult to make a call on how FY10 is likely to pan out, but one thing is clear, the days of 9%+ growth are over, believes Citigroup. As per a recent Citigroup Global Market report, India has lost the opportunity to sustain those levels for now, with growth coming in around 7%+ levels in FY09-10. With supply side measures not really being effective in bringing inflation down, Citi expects RBI to continue to raise rates to temper demand-side pressures. Much further monetary tightening however poses downside risks to both Citi’s FY09 and FY10 GDP estimates of 7.7% and 7.9%, respectively. Rising interest rates and input costs are also likely to result in a deceleration in investments to 10.4% and 7.9%, respectively. But what could possibly offset this are the low real interest rates and improvements in productivity. Wh...

Take A Leaf Out Of Historical Happenings, There Are Returns To Be Made THE long-term trend is pointing towards under valuation of the Indian equity market. The market, as measured by Price-to-earning ratio ( PE ) of the Sensex has just about pierced the long-term trend line. At the current valuation, it is quoting at a one-year forward of 16, little less than the earnings growth rate that Sensex companies have managed since 1991. If the theory of market returns chasing earnings growth is to be believed, this is just about time for accumulation for those looking at the longer haul. Since 1991, while the Sensex has grown at CAGR of 15.5%, its earnings grew at a rapid 16.6% per annum. In the past two years, the market went up partially on the back of ‘ PE expansion’ . It meant PE of the Sensex was getting priced higher than usual, since the market expected faster growth in earnings. But with the current correction, while valuations have been ‘cleansed’ of such expectations, there are pro...

It is better to plan for the long term and buy potential stocks at every fall There have been major corrections in the stock markets all over the world. All major markets have corrected significantly from their peak levels. Major indices in the domestic market - Sensex and Nifty - also saw large corrections over the last couple of months and are currently trading below their 200-day moving averages. The Sensex is at around 16,000 and the Nifty is at around 4,800 levels - more than 20 percent lower than their peak levels. The mid-cap and small-cap stocks are the worst hit in this market correction and this is reflected in the performance of mid-cap and small-cap indices. There are a series of events/factors that resulted in this global meltdown of stock markets . Here are some of the more significant factors that had a negative impact on the domestic markets. US sub-prime issue The meltdown in the markets world over triggered by the US sub-prime news is one. The meltdown worsened thank...

The market has fallen, leading investors to think of safer havens to invest. But here’s why you may still bet on the equity market. Here we bring some of the strategies. WONDERING whether to stay put in your stocks that may have been hit in the recent market crash or to liquidate and shift investments in other asset classes. Here are 10 reasons why it still makes sense to remain invested. Markets have come down from their recent highs in the past few weeks. While some of us might be thinking of cutting losses and putting money in safer havens, there are more than one reason still favoring the equity markets. Let’s check them out: a) Long-term plan, lest we forget: The basic principle that often gets buried in a bull market situation is that one should make investments with a long-term perspective. Any serious investor should remain invested in stocks, no matter what the current market situation is, for a couple of years but if the idea is to make quick bucks, probably he should sell an...