Recession And Sentiment

BSE Sensex fell to below 10,000 levels for the first time since January, 2006. This crash to 4 digits is a big blow to new investors who have never seen the implications of the bear market. Don’t try to find the logic behind this fall. FIIs are selling out of necessity but domestic funds are not in a position to fully stop the fall. Only positive aspect is that unlike in January, trading was not stopped even for a single minute means buying is still there from some quarters.

Sensex below 10,000 in June, 2006: Good growth with optimism.

Sensex below 10,000 in October, 2008: Slow growth with pessimism.




Significant rumours:

1. RBI will cut repo rate on October 24. Source: Times of India.

If this is true, Stock Markets will stabilise above 11,000 levels over short term. Indian Companies will take a breather and mutual funds will inject some money into the markets. If RBI delays this decision, BSE Sensex will soon touch below 9,000 levels.

2. High Court will give judgement in RIL-RNRL case by November. This will have huge implications on many Companies. Sooner the better! Loser may drag the case by going to the Supreme Court.

3. 3G auction will be held in January. Bad news.

Must read:

1. Warren Buffett wrote a good article in the New York Times on “Why I am buying Stocks?” But how many of us have his vision and patience levels. We buy stocks today and watch their prices from tomorrow onwards. Investors spoilt due to the last Bull Run.


Positive news:

1. Government is planning to remove the 49-MW cap on Wind Energy projects. This move will attract more foreign investments into this emerging sector.

2. United Phosphorus announced acquisition plans.

Recession news:



1. American Real Estate: construction of single-family homes plunged to the lowest level in 26 years.

2. French mutual bank, “Groupe Caisse d’Épargne” suffered a loss of $807 million in derivative trading.

3. Spanish-based airline LTE International has suspended operations after telling Spanish authorities that it was in serious financial difficulty.

4. Confidence among U.S. consumers fell by the most on record. It fell to 57.5 this month from 70.3 in September. Situation in US is looking grim despite Government’s bailout measures.

5. German Parliament lower house approved $675 billion financial bailout package.

6. JSW Steel postponed its Power IPO plans. Big set back to investors who are already reeling under economic slowdown.


Quarterly results analysis: Contrary to popular perception, midcaps and small caps are announcing superb results in this highly unfavourable atmosphere. These are the stocks that were corrected by 60-80% in the last 2 months despite posting good results in the last 2 quarters. Long term investors should accumulate these scrips for better returns.

1. Tata Coffee reported 228% increase in net profit in September quarter but sales rose only by 26%. Tata Tea will also announce good results in the last week of October.



2. Compact Disc India: This animation Company once again posted bumper results. It announced 119% increase in sales while profits rose by 114%. Its shares are trading at a forward P/E of 0.5. Unbelievable valuations. That is bear market!

CMP: 34.8 (BSE); P/E: 1.4

EPS: 25; Book Value: 40.

3. Like all brokerage firms, India Infoline also reported very poor results.




4. Goa Carbon: Bumper results. Company posted a net profit of Rs 2.8 crore Vs net loss of Rs o.45 crore in Q2 of previous year. 1289% increase in 6-month net profit! Can it able to continue its high growth?

CMP: 65 (BSE); P/E: 2.3

5. Poor results: Elecon Engineering, Madras Aluminium, Finolex Cables, Kavveri Telecom, Sasken Communication, Novartis India, Ratnamani Metals and SBI Home Finance.

6. Mphasis and Satyam posted wonderful results. But will they keep momentum? I am negative on this sector because of “Obama factor”. But they will participate actively in short term rallies.



7. FAG Bearings: Company posted outstanding results despite operating in unfavourable conditions. It reported 34% increase in sales while profits rose by 42%.

8. Sanwaria Agro Oils: Company announced 58.9% growth in net profit. Rs 23 crore Vs Rs 14.5 crore.

How to revive Indian Stock Markets:

Why good Companies are falling even after announcing bumper results? Why no one is buying even good Companies at cheap valuations? This is because of sentiment. Unless sentiment turns positive, it is impossible for stock markets to make positive gains. As long as panic is ruling, no one cares about results, valuations and fundamentals etc. Government, RBI and Industrialists need to do take steps that will drastically change the sentiment of investors especially FIIs.

1. RBI should immediately reduce interest rates by at least 1%. This is the most crucial step. CRR cuts will not help any more.

2. Ambani brothers should stop quarrelling in Courts and find an amicable solution. Reliance Gas has the potential to change the energy landscape of the country. Unless Reliance stocks perform, Stock markets will never recover in a big way. This spat is sending negative signals to the international community.

3. Rupee fall: RBI should stop this slide to save Indian Stock Markets. Why do FIIs want to invest in a country with weak currency?

4. Inflations need to continue its downward march. Oil prices should stay below $80 per barrel level.

5. Oil ministry should decrease petro product prices to control the inflation and input costs.

6. Companies need to announce more buybacks and acquisitions to trigger economy in positive direction. Liquidity is the problem. Financial Institutions should support such managements.

My opinion: Unless RBI takes measures like rate cuts; current market has more downside especially in large caps. But stocks (especially mid caps and small caps) which had more FII holdings before October are now corrected heavily and trading at least 50% below their fundamental prices. Except ICSA and Glenmark, most of these stocks have not recovered due to lack of support from either promoters or funds. But ICSA was well supported by promoters while Glenmark was supported by big investors.

Where will you get investment ideas?

Investment is all about common sense, keen observation and finding value. Keenly observe surroundings and find the emerging trends. Whether people are depositing more money in PSU banks out of panic? Whether you are seeing any rise in hospital visits? Whether people are consuming more alcohol to forget their problems? Whether there is any decrease in visits to multiplexes or Restaurants or shopping malls? Whether people are cancelling their expensive travel plans?

Defensive stocks Vs Growth stocks:

People generally tend to buy defensive stocks like HUL etc during panic situation. But long term investors should not do this mistake. Why? Do you want to satisfy with dividends? What is the difference in HUL price in 1983 and 2008?