Stock Market Outlook: Keep Your Expectations in Check

Sensex gained almost 57% (~9900 points) from its Aug 28, 2013 intra-day low of 17449 to its Sep 8, 2014 intra-day high of 27355. That is an exceptional performance considering it occurred during a period of high inflation, low GDP growth and high interest rates.

Inflation has started moderating. GDP growth is showing signs of picking up. But interest rates still remain high. From its all-time high of 27355 touched on Sep 8 ‘14, Sensex underwent a moderate correction of 4.4% by losing 1200 points to touch an intra-day low of 26150 on Oct 8 ‘14 – thanks mainly to FII selling.

Today’s bounce up from trend line (UL3) support is an indication that the correction may have run its course. Can the index gain another 9900 points to touch 36000 over the next one year? The possibility can’t be ruled out. But note that in percentage terms (~38%), the gain will be lower because of the higher base-effect.

In a recent article at morningstar.com, investors were advised to keep their expectations in check because the US market looks fully valued. The same can be said about the Indian market. With both markets near lifetime highs, there are no easy pickings left for new entrants.

Stock-picking skills will be tested, and return expectations should be moderate. That doesn’t mean stocks will not give better returns than bonds, NCDs or bank FDs over a 3-5 years period.

You can read the full article here.

Look at fixed income in a choppy market – a guest post

Many investment experts, who regularly appear on business TV channels, suffer from herd mentality. When the stock market rallies, they jump on to the bull bandwagon and start predicting higher and higher index levels.

When the market corrects, the same experts suddenly turn gloom and doom mongers and predict ever lower levels. Since the stock market’s nature is to fluctuate, opposing views from the same set of experts tend to confuse small investors – who end up sitting on their hands.

In this month’s guest post, Nishit takes a look at some fixed income options that small investors can look at, without taking undue risks in a choppy stock market.

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Stock Markets are going crazy with wild swings. Government Securities funds, which trade mainly in Government 10 year paper, are swinging too. So, what are fixed income instruments one can invest in?

There are a slew of investment opportunities in fixed deposits from second tier companies like India Infoline and Muthoot. These are medium risk and high return investments. I would advise people to stay away from these, especially those who depend on fixed income for livelihood. In case of default they can lose the entire amount. For those who can afford to take the loss, a small amount can be invested.

Options are also available for Non Convertible Debenture (NCD) side of the market, which are not given much prominence but are lucrative. Older series L&T Finance NCDs are traded on the BSE. They are giving a yield of 10-10.5% (taxable) and pay interest twice a year. If one digs deeper one can find out other such investment opportunities.

There is one more lucrative option started by Government called Tax-Free bonds. These are bonds issued by PSU undertakings with tenures of 10 to 20 years. They give returns of 8.5-8.75% or so. The Interest earned from these bonds is tax free. Rs 1 lakh invested in say Hudco bonds - currently on offer - will yield you Rs 8760 tax-free every year. Now, if a bank FD at 10% gives you Rs 10000 for the same principal of Rs 1 lakh, then at highest tax bracket ( approx. tax of 30.9%), you would be left with only Rs 6910 after tax.

Effectively, if you are in the highest tax bracket, you are getting safe return equivalent to that of a 12.5% bank FD. So, what is the catch? None on the face of it. Since, the bonds are listed on the stock exchanges, one can get out whenever one wants to.

If all this doesn’t appeal to you, then you have the good old bank Fixed Deposits. Interest rates are attractive for tenures of just over a year. If one wants to invest in the market after the current volatility gets over that is another option.

Also, if one looks at Gilt funds, the 10 year yield is now at about 8.45%. If the new RBI Governor walks his talk, one can see a cooling off of interest rates after some time – which will increase 10 year yields. However, this option is only for patient investors.

Thus, even amongst market turbulence, there are investment options which are safe and low profile. Investing is all about being smart not flashy.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)