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Happy Diwali 2008!

A very Happy Diwali to you all, and hope y’all have a great year ahead.

My last Diwali post needs a recap. A lot of stuff out there seems to have come true – the US financial market collapse, big drop in Indian equities, a large scale move by retail (remember, that was November, the index moved up in Dec/Jan and then crashed), and in general bad year for bulls and good for shorters.

What’s now? I have to say that while I expected a hammering I thought it would stop about 15% higher than this. Yet, here’s my deal for the coming year.

  • It will not be a year for the index. The index may gyrate between 1500 and 4000 (Nifty) and is likely to face sharp upmoves and slow downmoves through the year. It will not be worthwhile to invest in the broad index.
  • If 2008 was about world drama, 2009 will be about the collapse of the Great Indian Real Estate Story. Prices will start coming down, though it may take a full year for panic to set in. At least one real estate company – of the big ones – will go bust. At least one bank will face serious threat of collapse due to high exposure to RE. In all likelihood, the government will rescue the banks. Commercial real estate will be in the doldrums, with distress sales reducing prices even more dramatically. NRIs who invested in India and thought they will keep their properties for a good day will call their brokers to sell, at any price. Banks will refuse to lend to real estate. Some may even try to give homeowners margin calls, but that will fail as political pressure will force them back.
  • The dollar, after a small rise, will fall hugely against the rupee. People who hedge in the 50s will be treated as heroes.
  • Inflation will literally die. We will have to face asset and consumer price deflation, and are likely to take political measures to introduce more money into the markets.
  • Interest rates will fall suddenly; and so will consumer oil prices. This will not be enough to keep growth up for the year, but it will be a good setup for the years to come.
  • India, along with the world, will go into a severe recession. This means contracting GDP (no more 7% growth), unless there is a black-money-amnesty scheme set up, with dramatic tax cuts.
  • When interest rates reach 4%, equities will again be considered a good asset class, and more of the middle class will get in. More money will flow in from Pension funds, EPF and other long term saving sources.
  • This will be the year of individual stocks. Some stocks will give 100% to 200% returns in the next year, and some of them will be large caps; some others will be midcaps.
  • Job losses and slowing economy will result in political stress. If our public will not fight the stupid politicians, we will end up with a socialist setup that has no hope for recovery.
  • I will try once more to lose some weight. I will be successful this time.

These are all random predictions, with no bearing on what will actually happen – so please, don’t take these as advice. It’s for my own record; what I was thinking etc. It helps to later go back and say, “what an idiot I was”.

For the Record, Nifty closed at 2700 today in Mahurat Trading, and Sensex at 9000. I gotta see what happens next year. Till then, I’ll be posting other random stuff. Disclosure: Some positions on the Nifty.

  • Anonymous says:

    >Just to add a prespective from last US recessions. The broad indices have fallen 20 to 50% (overshot) from their fundamental values. If you consider Dow 7000-8000 or Nifty 2500 as fundamental base value then for shallow recession you can expect -20% (1990’s US Recession)overshoot and for severe recession it could be -50% (1980’s US recession). That means Nifty of 1250 to 2000. So you are quite correct in assuming Nifty bottom of 1500.
    At least I will wait for 1500 before jumping in haste. I am not Warren Buffet and cannot afford to loose my hard earned Capital.

  • Anonymous says:

    >You have not mentioned whose government will we see at the Centre next year. 🙂

  • kanagala says:

    >Thanks for your prediction. I will plan some of my investments with these inputs.

  • Anonymous says:

    >Happy diwali to you too deepak 🙂
    OMG its been more than one year since i have reading ur blog and u have been right quite accurately,…though i wish u were wrong 🙂

    and I m sure ur predictions will most probably be right this time…

    Thanks

    Roshan

  • Anonymous says:

    >You are expecting interest rates to reach 4%?#$%$@@? That’s about 50-100bps a month reduction Deepak. What is the logic (or lack of it) for a prediction like this?

  • TempleTree says:

    >Hi Anon:

    Could you explain why you think “Nifty 2500 as fundamental base value”? Is based on Market P/E?

    On Monday (27/10/2008) the Nifty P/E was 10.38 which I think is reasonably low. Is it bottom? I do not know.

    Another indicator is Market Cap / GDP ratio which I think was around 0.6 on Monday, which is a also quite low. However we are yet to see MF redemptions and final selling from common man, when that happens it is final capitulation. It seems last week MFs have sold stock in anticipation of redemptions, so I guess that event may just going to drain the cash holdings from MFs, without much selling.

    Assuming two years of recession in India and GDP contraction of 10% from here and Market Cap / GDP of 0.5, we can go 25% down from Monday’s intraday lows. In numbers ~1700 Nifty and ~5700 Sensex. Will they touch 1250 Nifty or 4200 Sensex in that process – I do not know.

    The other way I look at is: 2003-07 or probably 2004-2007 was a great bubble period in the World markets (in all asset classes.) So everything, if allowed to go back to, will go back to pre-bubble period days i.e. 2003-end or 2004-mid levels (everything including salaries in India). The corresponding Sensex is at ~6000. However the process could be painful and slow in all likely with over and under shoots. Salaries will not get adjusted unless there are job losses (I took a flat 20% cut in 2001, the problem is much bigger now). Some companies will cut jobs and some will also cut salaries. We have already seen Jet Airway’s drama. More to come ..

    Some banks will be in trouble mainly due to bad home loans and lending to urban work force who with no job or with lower salaries will not be able to pay housing EMIs, personal loan EMIs or credit card bills.

    I would say “Welcome to Subprime 4 (Indian Version)”.

    Once credit crisis start, PSU banks will certainly overtake some other banks, shareholders wealth in those banks will overnight disappear as soon as depositors queue up for their money. Here you know which banks are drawing deposits from public: http://economictimes.indiatimes.com/Banks_report_card/articleshowpics/3639813.cms

    Black money (how much % is in liquid assets?) and high savings rate can save this country in addition to PSU banks (something to cheer about).

    Just like Deepak’s these are my predictions and written here for me to come back and check after an year or so “how an Idiot I was”. Never depend on these for your investing.

    PS: I am slowly accumulating NiftyBeeS and some more large cap stocks, rest of the money in long term gilt funds. Reading Benjamin Graham’s “Intelligent Investor” umpteenth time to pass through this crisis. I am buying stocks for my son’s future college tuitions (who is now 2 ½ years), therefore I am very long term investor.

  • hinvestor says:

    >Looking back your last year’s post sounds “Prophetic”. Keep up your good job. Regards, Siraj

  • Anonymous says:

    >Temple Tree:
    Replying to your question:
    Fundamantal bottom measured by various factors like Price/GDP, P/B, P/E all points to more or less fundamantal bottom for Nifty around 2500. But the fear factor which plays heavily during bear markets (last few recessions in US)
    and tends to overshoot 20 to 50%.
    For very long term investor this fundamantal bottom is a fair value. But for those with shorter time frame like near retirees etc. it may be risky and would be better to wait for fear (panic) bottom.

  • Anonymous says:

    >deepak, one question, which i think is on a lot of people’s mind. Where do you put fresh money? If you put it anywhere at all!

    Here’s my scene: Income source: my monthly salary. Equity portfolio down by 50-60% – this is where most of my money is – some direct, some through MFs. Some money in RBI bonds at a pathetic 8%, some in gold – which has done well and some in post office schemes.

    Now my question is, given that i wanna put away money every month, where do i put it?

    An SIP? Pick up the some more stock, a good old FD or a Gilt Fund? gilt fund still make sense given the rate cut again today (1/11/2008)? Or has the opportunity passed? Also of the short/medium/long term funds available, which makes most sense given that rates are going to be heading south pretty fast – my guesstimate!

    Or do you just sit tight on cash? But given the huge liquidity injections cash is probably losing value faster than anything else!

    So what is one to do?
    Or not do 🙂

    Mark

  • Anonymous says:

    >would have helped if your predictions were more fact and logic based rather than pure intuition!

  • Deepak Shenoy says:

    >anon2: Government doesn’t matter – this is an economic prediction, not a political one!

    anon3: 4% – well, RBI has cut repo now by 1.5% in TWO weeks – and current rate is 7.5%. Why is 4% ridiculous?

    mark: No fundas on where to invest right now – the deal is in trading and individual stocks. I haven’t analyzed much lately, but there must be some really beaten up stocks that will show price strength in the coming monhts.

    anon: all my predictions are based on logic. I just don’t care to explain too much because to me it’s obvious; and I’ve been writing about most of this stuff anyhow. Still, do understand that these predictions are based on my personal thoughts, and therefore are of a personal nature. I don’t gloat about how good I am, and I will not be sad if I’m wrong. This is one place where I would be happy if I knew I was wrong before I could do more damage!

  • ASHLAY says:

    >1500 0n the Nifty is scary!!! If and when it reaches there…I agree with you on the real estate perspective though… But I seriously think its not a bad time to invest in equities right now also…selectively though…

    http://www.niftydaily.com

  • TempleTree says:

    >I am not clear what does the following change mean to banks/economy.

    Is RBI expecting significant meltdown and so diluting the accounting/provisioning rules?

    http://www.thehindubusinessline.com/2008/11/05/stories/2008110551920600.htm

    Helpful if some one shed light on the same? What probably RBI projecting internally?

  • JP says:

    >India has been registering GDP growth rate in the range of 6.0%-8.0% since 1995 with exceptions in 97, 00, 02. And 8.0%-9.0% since 2003. So one can view this as a temporary setback of one year instead of viewing as bubble