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-4 1 \ ( V ' UYV

! MARKET INSIGHT
Devangshu Datta

Welcome bears.
bulls stay away
L

I With sentiments turning negative,


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investors should focus on capital
preservation and liquidity
\
ne way to value a business is break-upvalue - net
0 w o r t h ~ t l ~ ~ ~ . m i s v e r y c o l b
It ignom future profits. A second rlppmwh is dis-
counted cash flows (DCF), assigning net present values
(NPV)to future cash flows. A third approach is the
I mndestinpcticeandthe preferredone,lf mailable:Com-
pare a business to its listed peers.

i These methods are used by merger and acquisition


specialists, by the venture capital industry and by I-
bankers looking to take a company public. They a n also
be used by retail investors. They are scalable, in theory,
at least. They can be used to price entire w k e t s . In a
globalised economy where investors and hedge funds
w i l y move funds ~ oentire markets~are mu- ,
tinely c o m w d to each other
Bythosestanda&,hdhhasalmys beenrichly-valued.
It trades at higher average PEs compared to most of its
developing economy @E) peers. This is because it has
. delimwd.hi~h grmtb with fair eomig@q~4q$&&e fu-
t mprojections have also b&n c o ~ ~
However, when globd capital is scarce,Fns cut back
o n D E ~ . A t ~ t i m e 8 , v d u a t btendtofallacms
m
DEs (usually across Mworld markets as well) and Indi-
an equity also sees downturns along with its wuntry-
peers. Investors place greater value on structural stability
(sustainable debt, for example) and less weight on
p * h ProSpects.
m-~u f . o o q a S w~ta d shape inbane :
of thase cammath, ba&h pwids. Equity prices haveJ
the^^Wof2011.Manyg
country eoontrmies are grass@ imbalancd, and the euro.
and dollar are both umkr p~essure.
For all the glib FII talk a h u t "bottom-up"investing,
c u r m q instability plays a major role in warning off flue.
more risk-averseglobal investors. In- tend to seek
shelter in hard currency havens when they see major d
global risks. Although India's fiscal deficits and inflation
~ m 1 1 0 w o r s e m ~ '
countries and in fact, bet-?
By k i S t O b l ' '..
' ter than some developed
standards, a much nations,the rupee is not a
deeper correction in M m q
So, on* front of cum-*
I

the marketis mnBdOnBIMMIS, .


,.likely.BearmarlretE m~~,Imajor~lem:
: caneasilvshwer isasoftmneymlth&;.
4 ".3opr&~W
values Conventio~l ~ ~ ~
-k~n"t dicates the Indian m e t'3
d d k r W . f$Mmldbe~hSfrwe
&uk ins d a a domesticinterest rates are .'
mhmwt . ~thediscountraterustr
also rise, which means the-
N F v o f t h e ~ ~ m r
key, and hawe, its market apitalhiim, SMUM WL 4~
~ m ~ o b ~ i s t e ~ w h a t
jor M t u t i o d playas consider &asonable.In the am-:
andhalf of calendar 2010, domestic institutional in- r
vestom 0were net sellers above N i 54004500 lev- 4

els. In 2010. the FTIs were net sellers only above 6100.
inJanuary201l.they%ebeenheqSenersdown~~.+
vh a *-averre environment, hewy insdhbional corn- I
mitments are unlikely at higher 1eveIs. So there may not 1
be a solid floor above Nifbr5400-5500 and it's quite possi-
ble the market will move
1
By m t i o n d
would trade at a FT of 21.
A much deeper mrmdi& is a&imIly mom likely by
W r i c o i l standards. Indianbear markets often I
I
P E l O l l . B e a r ~ k e t s ~ ~ s h w e m ~ ;
ofE~valuesmdoften,50pereentoff,asoccurredin,
the 200&09 bear market t
By this logic, the retail investor should be wary of in- I
creas~werallequitywmmilmentxat thisinstant. No con- I
v e n t i 0 a a l ~ t ~ w i U d e l m w o p t i m a 'l ~ s
in such a gloomy scenouia The b e t chance is to find d-
ternative investplents, includiw selective ah-, m to ,
:
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capitaldsuch time as there is a correction.Ybu could '
mUqve~ledaymd21-day~its~say,J~2011. ,
I f y o u d o n ' t l i k e t h i s i d e a a a d p d o n Y ~ t o s,
counter-cyclicals, or at least, businesses less likely to be
U$ymsentiment.FdPharmaaremo~&-
~to~~dsthanldsq~qcouldprwidesome
~ n . S u g a r a n d o t h e r a g I i s o ~ ~ a u r t 'l s o ~
, trends notco-relatedto equities.The enemsectorcouldal- 1
so disconnect from other trends (though en- develop .
ments inevitably affect the m a c m ~ m y ) ,.
If a large part of 2011, ma* the whole year, is bear- ;
ish,therewillbeno magicfmnuh All the aptionsmgpskd !
a b m c w l d b m n g . & I t a n i n v e s t o r i s m r e ~ t o c ~ m:e
1 out*unscathedif he faces the possibility of a big bear
r ,
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i- * .
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Trewury
.I I

y i i curve
widens to
record
BLOOMBERG
New Ywk. 15 January

dlffemcebetweenz-
and 30-year Treasury
yields widenedto a recordas
. investors demanded higher ' +

mmpensati~ when buying


e-
7 Tfie s o d e d yield curve
! &!epemdto3*~
pointssest~,we
1,
:

withanavemged~.~par-
centage points the past 10
' y e mT r q ~ u r i e ~ f e I l y ~ -
w r e p i s showed retail
and indmkhl pmduc-

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tionboth roseinDecember.
T h k M d ~ w i n b u y
up to $2 t .5 billiw in Trea-
surieSnextweek,including
. ~ o ~ - ~ t ! d ~
' '%amare h e w gener-
ally higher from here a we
see a d mrecovwjr, trending I
. ~ & i d J ~ ~ w
manages about $3 billion of
MamgenmtinMbmkee
The yield on the 30-year
bondrrxsefivebaais~m
, O.m-pW,to453
pcmt,from 4.48Sper-
on Januruy 7, acwdng to
price of the 425 pment se
curitydUeinN&rn
droppedh2,~$5per$1,000
I taee amount, to 95 1 9 ~ ~ .
Banks prefer 1-year CD to
contain volatility a I& WTrs ST
K .,
,,
<..;

,., ,
,.+$: . - , -,:,...', :.,..
:.A~.
r . .
' -.t;,.>.,%
d ' :,:.?, +
.:.:

1 {kmbanltmhikem,
This may push the rates on
short-term hsmments,"said
ommercial bank3 now
C
a mutual fund d d x
prefer one-yearcertifi- The wholwie price index
&e of deposit (CDS) to dMio11wasat8.43percent ,
sbrt-tam paper (ofthree-to in December, ~~d with ,
six-mnth dtuation) to raise 7 . 4 8 p r c m t a d a g o . ~I
money, asvaWilyintlw mon- market &ed the h e m -
eym8rketInthethreemonh berWPI~todato8.10
t h W @ December has made I p e r c e r r t .
them focuson sWMy and im-
prwing theirbalance sheet.
A private bond hroking I
ferred to remain on ad*-
lines on expectation
sholt-*coura*e
&* *
house head mid, the Ilecem- week The rates are w ed
bw qw@rsaw sharp rise in 1 brise to9259.40perm&,m&
~atletoliquidityaeficitamd ! UR dealers.
rapfdmwements in interest
rates (violatile market). *So, 40,IDOO - - 1(1
~ m c i n t h ~
~ ~ ~ a t 8 9 % 3
~ w m t t o f e d u c thefre-
e per cent, unchanged from
qwafle~6frepricing money
rakdknthemttrketattdthe
only my it dnbe done is by
.WCDsoflongertenure."
30,?00 - ;%d ,80-8
9.m9.50 p r cent,
z ~ - g . ~ ~ p a r a s r
, 4&nbr'pubBcsector bond
Rates on-v= *9
20,000 - -7 We,9.55-L%
ehangrdfroma
@
,
U
E
*
I
-6
10,000 w5
5-NOV 19-Mov 3-Dec
E m :Ral Fwtnight

t~mnaoney&' ' 'P s i d e b n e o n ~ o n s t h a t


beyaraagper=t* l h ~ ~ o f ~
Meanwhile, on Friday, in- hike policy rates at its review
w?ors, especially fund h- on January 25.
e$prefemdtoremainoatbe "rhereareapdafiortstbat